The UK economy will grow much more slowly than previously thought over the next two years as inflation takes longer to come down, the government’s economic forecaster has warned.
The Office for Budget Responsibility (OBR) said the economy would grow by 0.7% in 2024 and 1.4% in 2025.
That is down from a forecast in March of 1.8% and 2.5%.
The OBR added that the rate of UK price rises would not return to normal until 2025, a year later than expected.
However, the outlook, which was published alongside the chancellor’s Autumn Statement, suggested that government borrowing and debt would both be lower than previously forecast.
The spending watchdog, which is independent from government, publishes two sets of economic forecasts a year, which are used to predict what will happen to government finances.
These are based on its best guess about what will happen, and are subject to change.
According to the watchdog, the UK will grow by 0.6% this year – considerably better than what it expected last autumn, when it predicted the economy would fall into recession and shrink by 1.4%.
Hailing this, Chancellor Jeremy Hunt told Parliament the UK had “grown faster than the euro area” and was now “1.8% larger than pre-pandemic”.
The OBR said the economy had “proved more resilient to the shocks of the pandemic and energy crisis than we anticipated”. But it also said inflation had been “more persistent and interest rates higher” than expected.
It slashed its growth outlook for the next few years, even though its forecasts are slightly more optimistic than recent ones from the Bank of England.
It also warned that inflation – currently 4.6% – will only fall to 2.8% by the end of 2024, before falling to the 2% target in 2025.
Previously it forecast inflation would dive to 0.9% next year, and 0.1% the following year.
The Bank of England has put up interest rates 14 times since December 2021 to tackle soaring inflation, although rates have been held at 5.25% at its last two meetings.
The idea is that higher rates make borrowing money more expensive, so consumers hopefully spend less, demand falls and businesses raise prices less sharply.
However, higher interest rates also drive up mortgage rates, putting pressure on households, and they tend to make businesses less likely to invest which can weigh on the economy.
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