Last week, the UK government announced a budget program of spending cuts and tax hikes worth £55 billion. Meanwhile, the country is facing its steepest drop in living standards since records began.
The Office for Budget Responsibility confirmed that the country slid down into a recession and its GDP was likely to contract by 1.4% in 2023. The OBR has calculated that real disposable household income, a measure of living standards, is projected to fall by 4.3% at once in 2022-2023. This would be the biggest year-over-year decline since the Office of National Statistics began keeping records in 1957. However, the decline will be far from over, as it will be followed by the second-largest drop of 2.8% in 2024.
Between 2021 and 2024, household living standards are likely to fall by 7.1%, the lowest level since 2013-2014. This will also wipe out eight years of growth. Average per capita household income is not expected to recover to 2018-2019 levels until 2027-2028.
The OBR said that the declines would have been even more severe without the substantial financial support offered this year by the government in the form of fixed energy prices and living wage payments to low-income households.
The nominal wage growth increased in 2022 and they are projected to remain high in 2023 but it is not enough to prevent a significant drop in real wages, adjusted for the double-digit raging inflation. This is the main reason for the historic decline in household income. The OBR predicts that real wages will fall by 1.8% in 2022 and by 2.2% in 2023 before recovering and growing at an average annual rate of 1.3%.
Recently, Treasury Secretary Jeremy Hunt has announced £30 billion in spending cuts, £25 billion in tax hikes, and a £500 a year increase in government limits on household energy bills. These measures also included an additional two-year freeze on income tax thresholds and a reduction in the maximum income tax rate to £125,140, as well as higher taxes on the profits of energy companies.
The OBR's weaker wage forecast means that real wages are unlikely to return to their 2008 levels until 2027, assuming the Bank of England manages to tame inflation in the near future, which, according to the latest report, is not going to slow down yet. Continued financial support for households during 2023 will come in handy as never before, pushing inflation further upward and forcing the regulator to continue its ultra-aggressive policy, pushing the economy into recession.
Experts hope that a commitment to fiscal policy and the independence of the Bank of England, along with the involvement of the Office of Budget Responsibility and its less aggressive approach to economic policy, will be enough to revive the UK economy.
As for the GBP/USD pair, the British pound is keeping its balance, even despite a slight decline at the beginning of this week. Bulls are protecting the support of 1.1770 and trying to return the price to the resistance level of 1.1840. If the level of 1.1840 is pierced, the pair may return to the area of 1.1890 and 1.1950. Following this scenario, the British currency has all chances to reach 1.2020. On the contrary, if bears manage to take control over 1.1770, the pressure on the trading instrument may return. In this case, bulls' positions may become eliminated and all hopes for a bull market are likely to fade. If the level of 1.1770 is pierced, the GBP/USD pair may be dragged to 1.1710 and 1.1650.
As for the EUR/USD pair, the situation here is much worse. The pair has been declining throughout the day and lost more than 100 pips from the opening level. The demand for risky assets has significantly decreased, and sellers became more active in the market. The price needs to fix above 1.0270 to continue the growth. This is likely to spur the pair to rise to the area of 1.0330. Fixing above this level, it may climb to 1.0390. If the euro declines below the support level of 1.0220, the EUR/USD pair may be pushed back to 1.0160. In this case, the pressure on the euro/dollar pair is likely to increase, sending the price to the low of 1.0130.
