A sharp fall in energy costs and the predicted slashing of inflation means the UK’s economy could be faring better than feared, experts say.
Millions of people have been struggling with the toughest economic situation in recent memory, with soaring bills and slow growth amid forecasts of a prolonged recession.
But there could be good news on the horizon as we begin to see some green shoots of recovery that could give much-needed reprieve following the squeeze on household budgets.
Energy prices, though still high, are down 80 per cent from the peak last August, with gas prices projected to fall further throughout the year.
No increase in housing repossessions and a strong employment market is also a cause for optimism, the CEO of Principality Building Society Julie-Ann Haines told BBC Radio 4 on Sunday.
She said: “We haven’t seen across my own business, or indeed others in the sector, any increase in repossessions. We are getting more calls from customers who are concerned and that’s understandable given some of the very difficult increases that we’ve seen in gas, energy, petrol and food as you’ve just been talking about.
“But certainly cause for optimism, we have a very strong employment market, so in the past whenever recession has come, we’ve tended to see big increases in unemployment and we’re not expecting to see that, so that does give some cause for optimism.”
And Chris Giles, economics editor at the Financial Times, told the same programme the glass was “half full, not half empty” as forecasts for the economy “don’t look quite as scary” as they did in November.
On inflation, which is just above 10 per cent, he said: “We are expecting the number to be quite a bit below 6 [per cent] by the end of the year, we’ve had a lot of the big increases in prices; in gas prices, in food prices, they’ve already happened. So things shouldn’t get much worse and that’s why we might well be feeling better by the end of the year.”
Here, we look at the early indications that the country’s finances could be taking the first steps towards recovery – and where the challenges still lie.
Gas prices
Milder weather and high levels of gas storage are thought to be behind the drop in wholesale prices
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A dip in energy costs is expected in July bringing energy prices below the £2,500 price cap as wholesale prices of gas are expected to fall this summer.
Milder weather and high levels of gas storage are thought to be behind the drop, assuaging concerns that there could be a shortage of Russian gas as the war in Ukraine continues.
HSBC reported a drop from its earlier forecasts for future wholesale gas prices by about 30 per cent, forecast for 2024 by 20 per cent.
The bank noted that wholesale gas prices had halved since mid-December to levels not seen since before the invasion of Ukraine.
Energy bills
Energy bills are predicted to fall by just over 6 per cent from the previous estimate of £2,640 earlier this month. This would take the average bill to £2,478 this summer, according to an analysis by Investec.
Prices are then expected to reach an average of £2,500 a year in the second half of 2023.
The government’s energy price guarantee (EPG) has capped typical household energy prices under that amount for an average household.
However, there is no limit on the amount a household can be charged, and energy bills will still depend on usage, and the cap rises to £3,000 in April for a further 12 months.
Bills are still at a record high since the energy crisis in 2021 when households were paying an average of £1,200.
Housing market
A steep fall in house prices is looking unlikely, despite earlier predictions by lenders, estate firms and property platforms that average property prices could fall by up to 10 per cent in 2023.
The National Association of Property Buyers (NAPB) said that a predicted house price crash for the UK “looks increasingly unlikely” but that prices are still expected to continue falling over the next six months.
Jonathan Rolande, a spokesperson from the NAPB, said: “Although the outlook for 2023 in terms of house prices is far from rosy, the price crash, much feared by many, and wished for by a few, seems increasingly unlikely to happen”.
A steep fall in house prices is looking unlikely, despite predictions by lenders, estate firms and property platforms
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Mr Rolande said that he thought the market has the potential to bounce back, despite surging interest rates, a cost-of-living crisis, a pandemic and mortgage products being withdrawn.
“The list goes on and yet we have not seen a price freefall,” he said.
It comes as the number of first-time buyers hit the second-highest rate in 14 years last year as 370,00 people took their first step on the property ladder, according to Zoopla, who accounted for the rise with high employment levels and low borrowing costs.
Inflation
Rishi Sunak made his ambitious pledge to cut inflation by half in his “five pledges” speech earlier this month.
It looks like the prime minister could be on his way to fulfilling that promise as John Allan, chairman of Tesco, has said that he believed inflation will decrease by the summer.
However, the supermarket boss held back his optimism, warning that those on lower wages were likely to continue struggling.
Mr Allan told Sky’s Sophy Ridge On Sunday programme: “Our hope is that the peak of food inflation will probably arrive about the middle of this year but frankly that’s an aspiration as much as a forecast and that doesn’t mean prices will start falling, it means hopefully they will stop going up as fast.
Rishi Sunak made this ambitious pledge to cut inflation by half in his “five pledges” speech earlier this month
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“I think inflation will go down but remember halving inflation will still mean prices rising by 5 per cent or 6 per cent, which will look fantastic compared to now but prices will still be going up.”
Inflation surged last year to a 41-year high at the start of last year, and is currently at 10.7 per cent, with a target of two per cent.