United Kingdom: Recession looms large primarily driven by higher energy and food prices, as cost-of-living crisis intensifies though the core goods and services components The war in Ukraine, the unique structure of the also rose significantly. The government’s Energy U.K. energy market, and domestic political Price Guarantee (EPG) policy, which caps unit instability posed challenges to the U.K. economy energy prices, should keep a lid on inflation in the in 2022. Activity slowed consistently throughout near term. the year as higher commodity prices, tighter In our base case, we expect inflation to fall financial conditions, very low confidence, and a gradually from a peak of above 11% in the weak global growth backdrop all dragged on last quarter of 2022 and to average 6% to demand. This was before the mini-budget was 6.5% in 2023, well above the Bank of England’s announced and then renounced weeks later in 2% target. an effort to appease financial markets. We expect 2022 U.K. GDP growth of about 4%, Aside from energy prices, the Bank of England coming from a low 2021 base, but—as with will be closely monitoring developments in the other major developed markets—slowing to labor market to calibrate its appropriate policy –1% to –1.5% in 2023. response. As in the U.S., job vacancies in the U.K. remain close to record highs, and wage pressures We expect the economy to have entered recession have intensified, with wages rising roughly 6% in the third quarter of 2022. Business surveys year-over-year. The latter issue is of particular are now consistent with a sharp contraction in concern as strong wage growth will lead to more output, and consumer confidence metrics are persistent inflationary pressure, predominantly at historical lows. Forward-looking indicators, through the stickier services component. In our including Vanguard’s leading economic indicator, central scenario, we expect the Bank of England suggest further weakness ahead. We expect the to raise interest rates to around 3.5% by the end recession to last at least six quarters and to be of 2022 and to a peak rate of 4.5% in early 2023. deeper than in the euro area. We expect this restrictive policy stance to persist The U.K.’s annual rate of CPI inflation doubled through 2023. in 2022, from 5.4% at the start of the year to 11.1% as of October 2022. The acceleration was 27