The UK has officially entered recession and is set to shrink by 1.4% in 2023, Chancellor Jeremy Hunt said in his Autumn Statement on Thursday.
According to analysis by the Office for Budget Responsibility, unemployment will rise from 3.6% to 4.9% in 2024 before falling to 4.1%.
Living standards are expected to drop significantly as a result of job losses and high inflation. In its analysis, the OBR said that rising prices will erode real wages and reduce living standards by 7% in total over 2023-24.
Hunt has responded to the economic headwinds with a raft of tax hikes and spending cuts worth £55 billion, including an extended freeze on income tax thresholds and the lowering of the additional rate tax threshold.
While the plan is expected to bring rising government debt under control, the OBR said the drop in living standards over two years will wipe out eight years’ growth.
Marcus Brookes, chief investment officer at Quilter Investors, said: “Today’s Autumn Statement has painted a bleak picture for the UK with a black hole of £54bn being plugged with a mixture of spending cuts and tax rises. We have come a long way since the mini budget of just eight weeks ago when the Office for Budget Responsibility was cast to the side-lines. It has equally produced a glib outlook for a UK economy that is already in recession. The OBR has forecast peak inflation in 2022 with slow moderation going forward. It is, however, a lagging indicator and the economy will continue to slow in 2023.”
Brookes said for investors, the UK remains a difficult place to judge.
He added: “We are not necessarily at the end of the train of bad news and with a prolonged recession priced in we may need to wait for a more sustained downward path of inflation. However, fixed income looks more attractive than it has in quite some time, while quality companies with resilient revenue streams will outlast any recession that does take root. Being selective with the opportunity set will be key, but it is important investors are not put off by the bleak news and simply sit this period out.”
[Main image: nathalia-rosa-rWMIbqmOxrY-unsplash]
