OBR Report, March 2023 – key points

Latest forecasts from OBR suggest that the UK is now exiting a phase of exceptional inflation, which is welcome news, although the recovery will be slow and painful.

Inflation outlook easing

Inflation outcomes have slightly undershot previous forecasts, due mainly to changes in the global energy market (Charts 1.1 and 2.1).

Inflation is thought to have peaked in late 2023 and will decline fairly rapidly through 2023 and into 2024 – although, according to the Bank of England, inflation drivers may change, shifting from goods to services.

Inflation is not expected to fall below zero before the end of the forecast period in 2028, which means that there is no immediate prospect of a decline in living costs – recent increases will “stick”.

Food price inflation is also expected to fall as 2023 progresses, but at a slightly slower rate, meaning that food will become more salient as an inflation driver (Chart 2.3).

Recession avoided, hopefully

In November 2022,OBR suggested that the UK would fall into recession in 2023, although probably a fairly shallow one.

In the more recent forecast, economic outcomes are expected to be a little better. Growth will be very weak through the forecast period, but – technically, at least, recession will be avoided.

Due to the slightly better economic outlook, unemployment is expected to remain very low in the UK, although employment is expected to flat-line (Chart 2.15).

Household disposable income still falling

Pay growth in 2022 was strong by historic standards although well short of inflation. Pay is expected to remain strong in 2023, but will continue to lag inflation.

As a result, by the end of 2023, a typical UK household will have seen 3 years of falling “real” incomes by the end of the year (Chart 2.16).

Real incomes will begin to recover from 2024 onwards. However, it will likely be 2026 before incomes recover to 2021 levels.

Implications

The new OBR report is somewhat more upbeat than the previous iteration, but this is relative - it still describes an economy in difficulty, impacted by historic shocks and long-term structural disadvantages.

Inflation is expected to decline, but OBR does not expect significant deflation in the near- to mid-term, either for “all items” or for food and drink.

Household wealth has taken a major blow and most households will take years to recover. The consumer outlook will therefore remain very difficult and most will take a “defensive” approach to spending decisions.

Senior leaders in the food and grocery industry may now need to give some thought to how prices for shoppers may be reduced.

However, for most industry professionals – and for most shoppers – the major challenge will likely continue to be managing price increases.

Click chart to enlarge

Click chart to enlarge