What next for the UK economy?

‘Steepest decline in living standards on record’ forecast as recession expected to last until the end of 2023

Governor of the Bank of England Andrew Bailey faces the media on 4 August 2022
Governor of the Bank of England Andrew Bailey faces the media on 4 August 2022

The Bank of England said yesterday that the UK will fall into recession as it unveiled the biggest rise in interest rates for 27 years.

In an alarming set of forecasts for the economy, the bank said inflation would surge above 13%, causing the worst squeeze on living standards for more than 60 years.

It predicted that the UK would enter a recession in the last three months of this year, and that it would turn into the longest downturn since 2008. The economy is expected to “keep shrinking until the end of 2023”, said the BBC.

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What the editorials said

“There is little uncertainty about what lies in store in the short term,” said The Times. The rise in interest rates and soaring energy prices will cause “the steepest decline in living standards on record, with household disposable income forecast to fall by 3.7% over the next two years”.

The Telegraph said that the Bank of England’s outlook is “grim” and “it is possible that even the Bank’s latest forecasts could underestimate the misery to come”. The Daily Mail agreed, warning its readers that “even tougher times are hurtling down the track for British families”.

The Guardian questioned the effectiveness of the Bank’s move to hike rates, arguing it will “achieve precisely zero” in bringing down the price of wheat or oil on global markets. “All higher rates do in this scenario is add to the economic pain by making mortgages and credit card bills another worry for families already stressed about paying for energy and food,” it said.

What the commentators said

“If global energy costs remain where they are,” said Faisal Islam, economics editor of the BBC, the recession “will then last the whole of next year, with inflation barely below 10% even in a year's time”. This would not only affect householders but those in power, too. “Make no mistake, a forecast such as this would mean a wrecking ball to the forecasts for government borrowing,” he added.

The situation will make keeping a roof over your head harder, said Vicky Spratt, housing correspondent for The i newspaper. She wrote that rising interest rates mean we can expect “rent rises, rising monthly mortgage repayments and higher interest rates for first time buyers”.

What happens next for the UK economy will depend largely on who wins the Conservative leadership election, said ITV’s Robert Peston. “For Tory members, the choice for their leader and the UK's prime minister would be between lower immediate taxes with Ms Truss or lower immediate interest rates with Mr Sunak,” he wrote.

However, he added, “for the avoidance of doubt, neither Mr Sunak or Ms Truss are promising anything that would persuade the Bank of England the UK can escape a significant recession, a significant contraction in national income, this year”.

Are there any positive signs?

Glimmers of hope are few but those worried by rising interest rates might be encouraged by the news that market expectations of future rises are falling.

Writing in The Spectator, Ross Clark noted that the forward yield curve showed that while in June markets were expecting the Bank of England’s base rate to peak at 3.59% in July 2023, this week markets are expecting rates to peak at 2.85% in June 2023 – “quite a chunky downwards revision”.

And some prices are already beginning to fall. The Guardian said earlier this week that the trend in underlying inflation – which excludes fuel, food, tobacco and alcohol – is “encouraging”, with core inflation falling for two months in a row from 6.2% in April to 5.8% in June.

There are also suggestions that the UK will recover quickly once the crisis eases. “Our economy is in far better shape to bounce back once this global crisis is over,” said the Daily Mail, “and with unemployment low, we should be better placed than most European countries to recover”.

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