Jonathan Portes looks back on the predictions he made about the UK economy at the start of 2023 and assesses what he got right and wrong.
Every year the Financial Times asks, just before Christmas, 100-odd UK economists for their predictions for the year to come. And in recent years, in the spirit of Brad Delong’s call for economists to ‘mark their beliefs to market’, I’ve looked back at what I said last year (the 2022 edition is here).
‘UK households face a “miserable” 2023, according to a majority of leading economists, who forecast that the country will experience a worse recession than most other advanced economies. Many of the more than 100 experts who responded to an annual Financial Times questionnaire predicted a fall in real incomes, a drop in house prices, and rises in unemployment and borrowing costs this year. High inflation, now running at 10.7 per cent, is expected to linger for longer than elsewhere as the UK underperforms most other advanced economies amid high energy prices, a shrinking workforce and stronger interest rates. While many economists anticipated a weak recovery from the end of the year, the impact of Brexit and poor investment growth are expected to affect the UK’s longer-term economic performance, reducing its prospects for growth and living standards.’
This was perhaps on the gloomy side – there was in fact no recession in 2023, although total growth for the first three quarters was only 0.5%. This does indeed compare poorly with growth in the US (or some other advanced economies) but is no worse than elsewhere in Europe. House prices did fall slightly, and unemployment rose. The OBR estimates that real incomes did in fact rise slightly (as rising interest rates actually boost incomes on average) but are still well below pre-pandemic levels. Inflation was indeed somewhat more persistent in the UK, although it has now fallen back sharply.
Overall, the main mistake economists (collectively) made was to underestimate the strength of the UK labour market, both in terms of wage growth and (perhaps) employment growth, driven by higher than expected immigration.
What about me? My full responses, and my retrospective self-evaluation, are below.
Will the UK economy outpace or lag behind other developed economies in 2023 and how will it feel for households?
‘The UK’s relative underperformance is likely to persist. Brexit will continue to be a ‘slow puncture’ for the UK economy, and to the extent that the fall in labour force participation has been driven by the NHS crisis, this is also likely to continue to be a drag on growth. The squeeze on household incomes will continue, although cushioned by the energy price guarantee, relatively high nominal wage growth in the private sector, and inflation-linked increase in benefits and pensions’
Evaluation: Broadly correct, and better than the consensus, though I should have also mentioned higher than expected immigration.
Monetary policy: How tough will the Bank of England need to be in 2023 to curb inflation?
‘Inflation will fall back quite rapidly over the year and the Bank may not need to raise interest rates much further, perhaps no higher than 4%.’
Evaluation: Too optimistic – again, I did this last year – about the speed and timing of the fall in inflation, although it is now materialising. I still don’t believe that the UK is in a ‘wage-price spiral’, and I think it’s possible the interest rates rises we saw in 2023 will appear in retrospect to be overkill, but you probably should take my predictions on interest rates with a grain of salt.
Fiscal policy: Will the government need to announce further tax raises in 2023 to maintain sound public finances?
‘No. There is no need to raise taxes in the short term, especially given the likely sharp slowing in the economy. Over the medium to longer term, the UK needs structurally higher tax revenues. As the current crisis, not just in the NHS but in social care, crime and justice, and education, shows, these are needed to deliver decent quality public services in the face of demographic pressures. However, this would be best achieved by radical tax reform, and it is vanishingly unlikely that this government will undertake any such thing.’
Evaluation: Correct about tax rises in 2023. The medium term diagnosis remains valid and is increasingly widely shared.
Reasons to be cheerful: Will we see green shoots of recovery starting by the end of 2023?
‘Yes, the near-term gloom may have been overdone. By the end of 2023, barring further large negative shocks, things should have stopped getting worse, and most people should be seeing rising real wages. The UK’s longer term structural economic problems remain, however, and the government does not appear to have any meaningful strategy to address them. Indeed, as regards the impacts of Brexit, it appears — as does the opposition — to prefer to pretend they do not exist.’
Evaluation: Again, correct about 2023, and the medium-term assessment still appears entirely accurate, unfortunately.
In perspective: What is the best historical comparison for the downturn the UK faces in the year ahead?
‘Well, in contrast to some of the overheated rhetoric, it’s not the Black Death. Perhaps 1794-95, when a mild autumn was followed by a very cold winter, and food prices soared as a consequence of a poor harvest and disruption to trade with the continent. As Jenny Uglow wrote, “in many people’s minds the bread shortages were linked to the war, the government and official corruption”. The government refused to legislate for an increase in wages and responded forcefully to the resulting unrest with repressive measures.’
Evaluation: I will leave this to the reader.
So overall, reasonably accurate, and my (mild) relative optimism was correct, but too optimistic about inflation, again. My full responses on 2024 will be published as usual in the FT early in the New Year.
By Professor Jonathan Portes, Senior Fellow, UK in a Changing Europe.