The UK is set to enter recession this year but it will be shorter and less severe than previously thought, according to the Bank of England.
With inflation expected to slow, Bank governor Andrew Bailey said he believes the slump will last just over a year rather than almost two.
As a result fewer people are likely to lose their jobs, but there are still "big risks out there" which could continue to have an impact on the economy, he said.
A recession is defined as when the economy shrinks for two consecutive three-month periods. Typically companies make less money and cut jobs, leaving the government with less tax revenue to spend on public services.
The Bank is now predicting:
- The economy will shrink by 1% versus 3%, largely because "wholesale energy prices have fallen significantly."
- The unemployment rate will peak at 5.3% rather than 6.4%. It is currently 3.7%.
- Inflation will fall back to 8% in June before dropping further to 3% by the end of the year.
- If workers get big pay rises it could lead to a slower fall in inflation.
Rates rise
The forecast comes as interest rates were raised to 4% from 3.5%, their highest level in over 14 years.
The Bank has been putting up interest rates in a bid to tackle the soaring cost of living. Inflation, the rate at which prices rise, remains close to its highest level for 40 years - more than five times what it should be.
However, the Bank suggested interest rates may be nearing a peak, indicating it will only raise rates further if it sees signs that inflation will remain high.
It said: "In the latest modal forecast, conditioned on a market-implied path for Bank Rate that rises to around 4½% in mid-2023 and falls back to just over 3¼% in three years’ time, an increasing degree of economic slack, alongside falling external pressures, leads CPI inflation to decline to below the 2% target in the medium term."
In an interview with the BBC following the rates announcement, Mr Bailey said the country is not forecast to bounce back to pre-Covid levels until 2026, something he said was "extraordinary".
"Covid has had bigger long-run effects than we thought it would, particularly in terms of things like the labour supply and people choosing to come out of participating in the labour force."
FTSE 100
The UK's top share index, the FTSE 100, was down four-points at 7,815 shortly after opening this morning, following yesterday's 59-point gain.
Brent crude futures were down 0.24% at $81.97 a barrel.
Companies reporting today
There are now FTSE 350 companies reporting this morning