NIESR: The UK is likely to avoid a recession, but persistent inflation will damage household budgets

The UK is likely to avoid a recession in 2023, according to the NIESR, but warned that for millions of households it may well feel like one as they see a reduction in their overall disposable income and continue to fight permanently high energy and food costs.

It also warned that GDP growth was likely to remain at zero and that although inflation will fall, it will be sticky and take time to go down. Inflation is currently at 10.5%.

The independent research institute said inflation was one of the main concerns for 2023 at both the macroeconomic and household level. It expects that inflation will still be above 3% at the end of 2024 and will not reach the Bank of England’s 2% target until the third quarter of 2025.

The body said it was concerned about the persistent inflation, which will continue to reduce disposable income levels, particularly for middle income households - with energy prices and food costs mostly denting budgets.

“We project that 7 million UK households (1 in 4) will be unable to meet in full their planned energy and food bills from their post-tax income in 2023/24, up from around 1 in 5 in 2022/23,” it stated.

Professor Leaza McSorley, senior research manager (Macroeconomics) at NIESR, said the real risk to the UK economy is the reduction in household disposable income.

March budget: what could help?

The NIESR said the March budget could play a vital role in helping households tackle high food and energy costs. 

Professor Adrian Pabst, deputy director for public policy at NIESR, said it was likely that high prices were here to stay and since inflation is not going to come down rapidly, it was vital the government addressed this in the March Budget.

“Even when inflation comes down, price levels will remain high. Food and energy will be permanently high and it is up to policy makers to address this,” he said.

“Inflation has hit the squeezed middle earners the most as they are most likely to be affected with higher rates and mortgage costs, but will not have benefited from the same support packages.”

The NIESR called on the government to combine both social and a variable price cap to help households with energy bills. 

Where a social tariff would help the poorest households, a variable price cap would be a system where the price of energy rises with usage. 

Pabst added: “Low-income households have seen their disposable income fall by nearly 20% since the onset of Covid. Those worst affected tend to live in some of the most economically deprived areas of the country, including parts of the three devolved nations and the North-East of England whereas London and the conurbations of the South-East power ahead.”

NIESR has also called for loosening of fiscal policy by the chancellor in his Spring Budget, “rather than allowing himself to be governed by self-set fiscal targets”.

“To level up the country and reduce household-level inequalities, fiscal policy needs to be targeted, levelling up funding needs to be unified and applications simplified. And the government should put in place a long-term public investment strategy that helps to unlock business investment,” Pabst added.