Rates may have peaked, but economy remains fragile

The immediate recession should be milder and shorter than previously expected, as energy prices fall, and interest rates do not rise as high as previously expected.

That picture is reinforced by the Bank's decision while raising official interest rates to 4%, to remove hints that they might go much higher. For the first time in this series of 10 consecutive rises, the language suggests that the job might be done, or very nearly done.

Further rate rises are no longer presumed. The peak in interest rates could be imminent.

While this is still consistent with the energy shock recession lasting through this year and into next, it is far shallower and does not last as long as the two-year downturn previously predicted.

But on the other side, the recovery out of this downturn in the next few years is expected to be very sluggish indeed.

The Bank assesses that Brexit, the pandemic and the energy shock has led to an enduring hit to the economy. The workforce has not returned to its pre-pandemic size, unlike other major economies. This is mainly down to early retirements and therefore is likely to prove permanent. Fewer EU workers in key sectors suffering shortages also plays a part.

Enduring mark

The Bank has also reassessed post-Brexit goods trade data, and concluded that the hit is notably more than suggested by official data. It believes that the expected fall in UK productivity after Brexit "might have occurred more quickly than previously assumed".

In addition business investment - the key to boosting the economy in the long term - remains "very subdued" well below pre-referendum levels, hit by both Brexit and the pandemic.

Throw that all together and an economy that is still smaller now than it was before the pandemic and Brexit, might not exceed that size until early 2026, according to this new analysis. The promised "roaring" 2020s is looking more like a lost half-decade at least.

So the good news is that the immediate shock should be milder, with inflation, energy prices and interest rates higher than they were, yes, but now on a lower path than previously expected. But the shocks have left an enduring mark on the economy.

Is the Bank of England contradicting the message of the IMF on Tuesday, who also forecast the UK having a shrinking economy this year?

No it isn't. The forecast of a shallow recession in 2023 is roughly the same for both Bank and IMF. But after that, for the reasons outlined above, the Bank sees some sluggish years ahead.

"The IMF actually take a slightly stronger view than we do," the Bank's governor Andrew Bailey told me when I asked. And some of the reasons for the longer term hit to the economy are specific to the UK.