UK will avoid recession, say Bank of England Bosses

Real household income is not expected to fall again this year and the UK is likely to avoid a recession, according to the Bank of England’s Monetary Policy Committee.

The stimulus from the lower energy price guarantee is one of the factors driving up the real income forecast, as is stronger growth in household labor income, particularly in the last quarter of last year, it added.

The MPC said in its monetary policy report today: “The price cap is based primarily on energy wholesale costs, which have fallen further since the February report, providing further impetus to real income growth.”

Central Bank Governor Andrew Bailey told reporters there was “more resilience in the economy than we expected” amid allegations that earlier forecasts were too gloomy.

Higher household incomes are also expected to support stronger consumption growth this year than predicted in February.

However, nominal wage growth has fallen slightly to a rate close to the projection in the February report, the MPC noted.

The MPC said: ‘Models estimated by bank staff suggest that households’ short-term inflation expectations, which tend to be close to actual inflation, have been a key driver of the pick-up in wage growth.

“These, in turn, are expected to be the main driver of the expected easing of wage growth as headline inflation declines on the back of lower energy prices, base effects and easing cost pressures.”

Inflation falls, growth rises

The MPC expects CPI inflation to fall ‘sharply’ from April to about 8.2 percent in the second quarter.

By the end of the year, inflation is likely to be around 5 percent, he added. However, high food prices appear to be aiming to keep the pace of inflation’s decline slower than expected.

By the end of 2024, inflation is likely to be closer to the 2 percent target and below 2 percent by 2025.

That is about three-quarters later than in the February report, mainly due to higher-than-expected food price inflation.

Higher food price forecasts had added about 1 percentage point to future inflation compared to February, the MPC said.

Bailey also said the outlook for inflation going forward remains “more uncertain.”

The MPC, long criticized for its overly gloomy outlook, raised growth forecasts for the UK economy by the highest level ever.

The central bank is no longer predicting a recession after revising its growth forecasts based on dismal data released in February, the biggest improvement since it first issued forecasts in 1997.

The change in the outlook for the economy contrasts sharply with the MPC’s forecast six months ago when it said the UK would enter its longest recession on record.

However, growth forecasts remain sluggish. The MPC expects the economy to grow by 0.25 percent this year, after a contraction of 0.5 percent was announced in February. GDP is also now expected to increase by 0.75 percent next year.

Cheaper energy, fiscal stimulus and improved business and consumer confidence mean that the central bank no longer expects a recession this year and expects the economy to be 2.25 percent larger than before in three years’ time.

House prices are ‘stabilising’ and fixed mortgages are growing

Mortgages and home prices were a major theme in today’s update of the MPC.

In the year to February, data from the Office for National Statistics showed that house price growth slowed to 5.5 percent.

Buried deep in its report, the MPC said its contacts had suggested UK house prices could ‘stabilise’.

It added: ‘In 2023 Q1 and into April, confidence in the housing market appeared to have recovered somewhat, compared to the weak position in the previous quarter.

‘Viewings started to pick up and more properties were put up for sale. Contacts expected house prices to stabilize after several months of modest declines. The transaction level was expected to be lower than in 2022, but about normal. That was stronger than expected at the beginning of the year.’

As for mortgages, Bailey said that while mortgage rates have fallen slightly in recent months, they remain “much higher” than they were a year ago.

The central bank said that while rates on new mortgages have risen by about 300 basis points, the effective interest rate on new loans has risen by less.

This is because, it said, fixed-rate mortgages account for 85 percent of outstanding mortgages, meaning many have to pay even higher rates.

Bank of England decision-making under pressure

At a press conference with reporters today, Bailey and his team came under repeated fire for their predictions, when asked if they had been too gloomy and why they always seemed to be wrong.

As always, the current interest rate hike, forecasts and insights have come under heavy scrutiny.

Suren Thiru, economics director at ICAEW, said: “The Monetary Policy Committee should be more forward-looking in setting interest rates rather than focusing too much on current inflation, given the long time lag between interest rate hikes and their impact on the wider economy.

“With most rate hikes yet to be passed on to households and businesses, the Bank of England risks exaggerating rate hikes, hurting our growth prospects and exacerbating the cost of living crisis.”

Meanwhile, Michael Hewson, chief market analyst at CMC Markets UK, said: “The bank is now seeing growth of 0.2 per cent for Q1, with figures to be released tomorrow, and also 0.2 per cent for Q2, while improving GDP. forecast for 2023 from -0.3 percent to 0.25 percent and points to growth of 0.75 percent in 2024.

“While this is welcome news, it’s also important to remember that the bank predicted a two-year recession just over six months ago, so their track record isn’t particularly good.”

Nicholas Hyett, an investment analyst at Wealth Club, said: ‘The challenge facing Andrew Bailey from here is keeping a perfect bowl of economic porridge at the right temperature.

“Global economic gusts, not least the growling bear of a US banking crisis, are unpredictable.”