UK faces long recession and deepest plunge in living standards on record, Bank of England warns

Britain will plunge into a year-long recession this autumn in which households will be hit by the deepest fall in living standards on record, the Bank of England has warned.

In one of its bleakest ever assessments of UK economic prospects, the bank’s Monetary Policy Committee (MPC) said inflation will now peak at 13.3 per cent in the final three months of this year as average energy bills treble from £1,200 in 2021 to £3,500 by October.

The economy is now forecast to shrink in five consecutive quarters for the first time since the global financial crash of 2008.

The inflation forecast was up sharply from the 9.4 per cent predicted just three months ago, with prices now on track to continue rising rapidly throughout 2023.

It means the cost-of-living crisis will continue throughout next year and only begin to ease in 2024, according to the Bank’s latest forecasts. Real household incomes are expected to decline by around 5 per cent, on average, over two years – the deepest fall since records began in 1960.

The dire figures will cause concern for whoever become prime minister.

Liz Truss has pledged to slash taxes by billions in a bid to win over Conservative party members while Rishi Sunak, has attacked the plan as being fiscally irresponsible.

Neither candidate has laid out detailed plans for how they would support families struggling through a rapidly worsening cost-of-living crisis.

Joseph Rowntree Foundation chief economist Rebecca McDonald said: “We already know seven million low-income families had to sacrifice food, heating, even showers, this year because they couldn’t afford them.

“While the government might have taken a break from acting on the cost-of-living emergency, these families can’t take a holiday from the year of financial fear.

“They will be wondering why further urgent solutions needed to shore up family finances ahead of the winter are not yet being put in place.”

Labour’s shadow chancellor Rachel Reeves, said: “This is further proof that the Conservatives have lost control of the economy, with skyrocketing inflation set to continue, while mortgage and borrowing rates continue to rise.

“As families and pensioners worry about how they’re going to pay their bills, the Tory leadership candidates are touring the country announcing unworkable policies that will do nothing to help people get through this crisis.”

Experts said that energy costs could rise further still in January, with Investec predicting bills for the average household will now hit £4,210 in January, when regulator Ofgem revises its price cap.

The MPC warned that there was “exceptionally large” risk around its latest projections, and the situation could deteriorate further if gas prices move higher still.

Analysts believe that scenario is increasingly likely after Russia cut back supplies to Europe last month and governments across the continent began to ration supplies.

If the bank’s latest forecasts prove to be correct, households’ real earnings in 2024 will remain below the level they reached during the crash, marking an unprecedented period of stagnation punctuated by multiple crises.

The bank said that acute labour shortages will mean firms continue to offer higher wages to recruit skilled staff, but this will be dwarfed by the rising cost of living, driven by energy costs. Average pay rises will jump to 6 per cent – less than half the peak rate of inflation, the MPC said.

Even after the economy begins to grow, further pain lies in store, with unemployment set to climb from 3.8 per cent to 6.3 per cent in 2025.

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