The government’s forecaster expects the economy to grow by 3.8% this year, well below its previous forecast of 6.0%.
It is “too early to know the full impact of the Ukraine war” on the UK, the Office for Budget Responsibility (OBR) said.
Mr Sunak told MPs that the prospect of lower growth had not damaged the country’s “strong jobs performance”.
In his Spring Statement, Chancellor Rishi Sunak said the OBR’s “initial view, combined with high global inflation and continuing supply chain pressures”, means it is now forecasting growth of 3.8% in 2022, followed by 1.8% in 2023, then 2.1%, 1.8% and 1.75% in the following three years.
The OBR publishes its Economic and Fiscal Outlook twice a year. In October, prior to Russia’s invasion of Ukraine, it forecast growth of 2.1% in 2023, 1.3% in 2024 and 1.6% in 2025.
GDP or Gross Domestic Product is one of the most important ways of showing how well, or badly, an economy is doing.
It is a measure – or an attempt to measure – all the activity of companies, governments and individuals in an economy.
GDP allows businesses to judge when to expand and hire more people, and for government to work out how much to tax and spend.
Living standards hit
In its report, the OBR said Russia’s invasion of Ukraine had “major repercussions for the global economy, whose recovery from the worst of the pandemic was already being buffeted by Omicron, supply bottlenecks, and rising inflation”.
The jump in oil and gas prices brought about by the conflict would “weigh heavily on a UK economy that has only just recovered its pre-pandemic level”, it added.
Petrol prices had already risen by 20% since the OBR’s previous forecast, and household energy bills are set to increase by 54% in April.
The OBR said that if wholesale energy prices remained as high as expected, then energy bills would rise by another 40% in October, pushing inflation to a 40-year high of 8.7% in the final three months of the year.
With inflation at these levels, real incomes and consumption would be eroded the OBR said, hence the dramatically lower GDP forecast.
As a result, “real living standards are set to fall by 2.2% in 2022-23 – their largest financial year fall on record – and not recover their pre-pandemic level until 2024-25”, the OBR said.
