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Spring Statement: PwC comments on economic outlook

23 Mar 2022

Barret Kupelian, senior economist at PwC, comments on the OBR's economic forecasts, and what today's announcements mean for household cost of living pressures, energy price rises and labour productivity

Barret Kupelian, senior economist at PwC, says

The Chancellor opted to bank most of the gains from the fiscal overperformance earlier this year with some giveaways for businesses and households facing historic cost pressures. Despite this, according to the OBR, the choices made by the Chancellor today mean that tax receipts as a proportion of GDP are on course to reach 36.2% of national output by 2024/25 - the highest level since 1949.

The suite of policies supporting households announced in the Spring Statement and in the past few months - including a 5p temporary cut in fuel duty and the permanent increase in the National Insurance contributions (NICs) primary threshold - will alleviate some of the squeeze. The OBR expects these will offset around one third of the fall in living standards that would have otherwise occurred in the coming 12 months.

But this is not enough given the large terms of trade shock the UK and other economies are facing. Households are under unprecedented pressure. The OBR’s forecasts confirmed that household real disposable income per person is expected to contract at its fastest pace for at least the last 65 years, shrinking by more than 2%.

We expect energy prices to continue to drive the inflation story in the coming few months. PwC’s analysis of the latest data shows the energy price cap could be due for an additional one third increase in October this year after the approximately 50% increase pencilled in for next month.  

The OBR’s view is this could take inflation to 8.7% in Q4 this year - the last comparable point in recent history is the second quarter in 1991 before the UK crashed out of the Exchange Rate Mechanism.  

On a more positive note though, the OBR thinks that the economy will continue to operate at full employment, with an unemployment rate of around 4%. In our view, this means that labour markets will continue to remain tight and that it is unlikely that the roughly half million people who left the workforce during the pandemic will re-enter the job market.

More importantly it shows the urgency at which both business and government should focus on improving the UK’s level of labour productivity. The OBR estimate of longer term UK growth in the region of 1.3% a year is significantly below the UK’s historic performance of around 2% a year prior to the global financial crisis. Solving the productivity puzzle will mean that the government can unlock the key driver of growth and can therefore dedicate more resources on the three main challenges of the future: the green transition, the levelling up agenda, and the increase in demand for healthcare services.

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