Chilling economic forecast for major nation

Britain’s economy might not grow again until 2024.

That was the dire economic outlook from the country’s central bank as it ratcheted interest rates up by three quarters of a basis point to 3 per cent on Thursday.

It came the day after the United States’ Federal Reserve also hiked interest rates by 0.75 percentage points.

Like many countries, the UK is struggling with cost of living rises associated with the Covid shock to the economy and energy issues exacerbated by Russia’s war in Ukraine. But Britain has also had to contend with uncertainty caused by its chaotic exit from the European Union and the more recent political chaos in Downing Street, with a revolving door of prime ministers.

The economy will be a chief area of concern for Rishi Sunak, this month’s British PM.

Some commentators have said the recession may mean Mr Sunak will try to put off an election until the current government’s full term ends in 2024 rather than risk going to the polls in a downturn.

On Thursday afternoon, the Bank of England – the UK’s central bank – lifted interest rates from 2.25 per cent to 3 per cent, a 0.75 per cent hike not seen since 1989.

There are warnings rates could rise as high as 5 per cent.

That will mean higher rates for savers but higher outgoings for those with mortgages and other debts.

The bank also said Britain was facing a two-year, “very challenging” recession, which likely won’t end until mid-2024.

Unemployment in the UK is also expected to almost double from the current 3.5 per cent to 6.5 per cent.

Longest recession since records began

“The (Bank of England’s monetary policy committee’s) latest projections described a very challenging outlook for the UK economy,” the bank said.

“It was expected to be in recession for a prolonged period and consumer price index inflation would remain elevated at over 10 per cent in the near term.”

The bank said it was likely the UK has already entered a recession in the third quarter of this year due to rising costs, particularly on energy bills.

A recession is generally defined as two consecutive quarters in which the economy contracts.

The good news in the gloom for Brits is the Bank of England has projected the downturn in the UK will be relatively shallow. Output might go down by around 2-3 per cent, compared to a fall of more than 6 per cent in the 2008 credit crunch recession.

But the bad news is it could be the longest recession since records began in the 1920s, said the bank.

Inflation as also expect to hit 11 per cent in the current quarter

Bank of England Governor Andrew Bailey was asked by reporters if it was fair to raise interest rates as costs were rising too, all of which would impact household budgets. But he said inflation had to be tackled.

Jeremy Hunt, Britain’s finance minister, concurred.

“Inflation is the enemy and is weighing heavily on families, pensioners and businesses across the country.

“That is why this government’s number one priority is to grip inflation, and today the bank has taken action in line with their objective to return inflation to target.”

Britain’s economy of US$3.2 trillion (A$5.1tn) is overall the world’s fifth largest in terms of gross domestic product behind only the US, China, Japan and Germany and just ahead of India, France and Italy.

Its economy is roughly twice as large as Australia’s, which is US$1.7 trillion (A$2.7tn).

Any shrinking of the UK economy could have an outsized effect on other nations. This could include Brits dialling back on discretionary spending such as trips abroad.