United Kingdom 2021-2023 outlook : another challenging year
- Summary of our scenario
- Latest economic trends
- The basis of our scenario
- Focus on labour force participation
The recovery slows as pandemic support is withdrawn, vaccines appear less effective than initially thought against new variants and costs of living rise. A new and much more infectious variant, Omicron, has been spreading at a rapid pace across the UK since early December. Hence, one of the key downside risks to our scenario has materialised, prompting downward revisions to our already cautious near-term outlook. After a disappointing Q3, we expect a further slight slowdown in Q4 and still weak growth in Q1.
Fiscal stance is turning sharply contractionary, despite greater planned public spending. The fiscal stance is characterised by a sharp tightening between 2021 and 2024 as pandemic-related support is withdrawn (the structural deficit is expected to decrease from 8.3% to 1.8% over the next three years). In October, the government eased that stance significantly through an unexpected increase in spending, partially offset by a greater tax burden. As a result, the fiscal tightening will be cut sharply for fiscal year 2022-23 (by 0.8% of GDP). The OBR estimates that this lesser degree of tightening will boost GDP by 0.4% over the 2022-23 fiscal year.Slavena NAZAROVA, Economist