The UK economy is expected to shrink this year but narrowly avoid an official recession in a better-than-expected performance for the country.

Inflation – the rate at which prices rise – is also expected to more than halve this year dropping to 2.7%.

However, even with the improved forecast for economic prospects, the government’s forecaster warned of a big drop in living standards.

Analysts warned that the UK was “not out of the woods yet”.

Independent research group The Institute for Fiscal Studies said the economic picture hadn’t changed “enormously since the autumn”.

“The Office for Budget Responsibility (OBR) expects the economy to grow a bit faster in the short-term, and a bit slower in the medium-term, combining to produce an economy 0.6% larger in real-terms in 2027-28 than under the autumn forecast,” director Paul Johnson said.

The chancellor also said the UK was on track to meet the government’s self-imposed fiscal rules.

According to these rules, government debt must be falling as a percentage of economic output in five years’ time and the budget deficit must be below 3% of gross domestic product over the same time period.

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