UK inflation will decline in 2023, but energy bills and taxes will rise as house prices fall. Happy New Year | Larry Elliot

Oar in Europe. Political unrest. A stagnant economy. Skyrocketing energy bills. Highest inflation rate in over four decades. Higher interest rates. That was the story of 2022. Truly, the past year was – in the words of the late Queen – an annus horribilis.

So 2023 will have to do the same to match its predecessor for drama. The bookmakers would, for example, give you relatively long odds that it would be another year of three Prime Ministers and four Chancellors of the Exchequer.

Less drama doesn’t mean life is going to get any easier. Instead, interest rates and taxes rise, and government support for energy bills is reduced. Price increases will far exceed earnings growth. The economy will probably fare a little better than some of the more gloomy forecasters expected, but that’s not saying much. It’s likely that 2023 will look a lot like 2022, at least for the first half.

Obviously, recent history means that another black swan event – something major that should have been predictable but still catches people off guard – cannot be ruled out. It is also entirely possible that some of the identified risks will materialize. Russia could use nuclear weapons in its war against Ukraine. China could decide to invade Taiwan. If so, all current forecasts for the coming year would be hastily revised.

But on the (admittedly heroic) assumption that there won’t be a 2023 equivalent of the 2020 pandemic or 2021 supply chain bottlenecks, here’s how the economy might unfold in 2023. But first, a health warning: the tendency for unexpected big things to happen makes economic forecasting a game of cup. The following is almost certain to be false.

Prediction number one: interest rates will peak at a level below what financial markets currently expect.

There isn’t much good news right now, but one encouraging sign is that inflationary pressure is easing. Global factors pushing up the cost of living have reversed in recent months. Wholesale petrol prices are down more than 50% from last summer’s peak as UK motorists benefit from a drop in the cost of crude oil.

Inflation will continue to decline in early 2023 as last year’s sharp price increases will not be repeated, allowing central banks to limit future rate hikes. That’s good because the three largest economies in the world will all experience difficulties in the coming months. There is no obvious candidate for a powerhouse of the global economy in 2023, and further aggressive action by major central banks will mean that recessions will be longer and deeper.

The Bank of England is set to push UK official borrowing costs to 4% in February, making it 10 successive increases since December 2021. After that, however, it could decide to wait and see what happens. will happen.

Prediction number two: The UK will be in recession for most of the year, but it will be relatively shallow.

In November, the Bank of England predicted that an already contracting economy would continue to weaken through 2023 and not resume growth until 2024. This forecast, however, was based on a much higher trajectory for interest rate (a hangover from the Liz Truss short). lived through the post of prime minister) than currently seems likely. Given the pressures on household budgets from higher inflation, it is surprising that the economy has held up as well as it did in the second half of 2022, perhaps buoyed by people who have exhausted the savings accumulated when spending opportunities were limited during the coronavirus pandemic. While there is obviously a risk that the economy could suddenly deteriorate, the relative strength of the labor market means that the decline in output from peak to trough may be limited to 1.5-2%, a much smaller decline dramatic than the nearly 6% contraction of the global financial crisis.

Prediction number three: While the recession will be relatively mild by historical standards, it won’t feel like it.

The Resolution Foundation think tank has helpfully provided a list of villains households will be facing in the coming months. Average energy bills will rise by £900 a year as government support is reduced; the typical family will see their taxes rise by £700 a year; around 2 million households will switch to more expensive mortgages costing the average fixed rate homeowner £3,000 a year; and wages will no longer keep pace with prices.

Put it all together and the standard of living will fall by 3.8% in 2023, an even bigger drop than in 2022.

Prediction four: There will be a sharp drop in real estate prices.

The UK property market is one of the main reasons Threadneedle Street is likely to be wary of raising interest rates too aggressively. Prices reached absurd levels in 2020 and continued to rise until a combination of higher interest rates and unaffordability led to the start of an inevitable correction. The Nationwide Building Society reported on Friday that prices have fallen for four straight months, the first time this has happened since the 2008 global financial crisis – and that process is far from over. The question is not whether real estate prices will fall in 2023 but by how much.

Prediction number five: Economic recovery will come too late to save the Conservatives from defeat in 2024.

The economy will deteriorate before it improves. Falling living standards and falling house prices mean little chance of a feel-good factor any time soon. Rishi Sunak stabilized the markets after the Truss experience but not more than that. A long period of conservative rule is coming to an end.