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Despite the end of the COVID-19 restrictions from late January,
the immediate outlook for the UK economy is uncertain
Intensifying price pressures and imminent tax hikes will erode
real household incomes.
Persistent supply chain disruptions and acute labour shortages
will continue to constrain output developments
The narrow EU-UK trade deal weighs down on UK exports to the
reviving EU economy.
UK real GDP grew by 1.0% quarter on quarter (q/q) in the fourth
quarter of 2021, compared with an identical rise in the previous
quarter.
In annual terms, the economy rose by 6.5% year on year during
the same quarter, which implied that the economy grew by 7.5% in
2021, the largest gain since the Second World War. However, this
was after a 9.4% contraction in 2020, with the UK enduring a
larger-than-average hit from COVID-19 and public health
restrictions.
The UK outlook for 2022 is uniformly less upbeat, flagged by
sliding growth projections.
Despite the end of most COVID-19 restrictions from late January
2022, we expect real GDP growth to slow in the first half of this
year for the following reasons.
Many UK households face escalating cost of living
pressures
The consumer price index (CPI) in the twelve months to January
increased to 5.5% in January, the highest rate since the series
began in January 1997, and since March 1992 (7.1%) when using the
historical-modelled data.
More inflation pain lies ahead. Elevated energy futures prices
forced the UK energy regulator Ofgem, which sets the tariff caps
twice a year in April and October, to announce significant hikes.
The tariff cap in April this year will increase by 54%, the largest
increase since the government introduced the cap in 2019. This will
imply notably higher household utility prices for 22 million
households from 1 April.
The eye-watering rise in utility prices will ratchet up the
anticipated peak in the 12-month rate in the CPI to over 7% in
April 2022. Worryingly, Ofgem is expected to announce a further
sharp increase in October, pointing to a
higher-than-previously-anticipated inflation rate at the end of
2022. Meanwhile, households face more challenging fiscal and
monetary policy conditions.
Employees face rising social security contributions from 1 April
2022 to finance the overhaul of the social care system and to
allocate more resources to deal with the backlog of non-COVID-19
illnesses. The plan entails a 1.25-percentage-point rise in the
National Insurance from April 2022. Meanwhile, the continued and
broad-based climb in inflation prompted the Bank of England (BoE)
to announce its first back-to-back interest rate hike in seventeen
years in its February 2022 meeting. Furthermore, we expect further
increases at both the March and May meetings, taking the Bank Rate
to 1.0%. In addition, we acknowledge the increasing probability of
an additional hike to 1.25% in November 2022.
Overall, we expect an intensifying squeeze on household
confidence and real incomes. Early indicators are not encouraging,
with real wages in retreat from late-2021. Furthermore, we now
expect household disposable income adjusted for inflation to shrink
in 2022, which would be the third time that it has fallen since
1990.
In addition, a greater share of savings accumulated during the
lockdowns could be required to finance spending on essential goods
as opposed to consumer durables and leisure and hospitality
services.
Intensifying pressure on household budgets will weigh down on
consumer spending developments and act as a handbrake on the pace
of GDP growth in the next few quarters.
Supply constraints spill into 2022
The IHS Markit/CIPS UK Composite PMI survey reveals a continued
shortfall of workers in January, preventing many companies from
achieving full capacity.
Supply chain disruptions continue to elevate input cost
inflation in January, with manufacturers and service providers
having to lift aggressively their prices charged.
Firms cite rising salary payments alongside higher energy and
logistics costs as significant obstacles.
Brexit strikes again
With the UK leaving the EU single market and Customs Union, UK
exporters face additional checks for safety and security
documentation, and customs papers, implying that the new EU-UK
trading relationship does not deliver frictionless trade.
This is flagged by UK exporters failing to exploit the revival
of domestic demand across the EU. According to Eurostat data, UK
merchandise exports to the EU in nominal terms shrunk by 13.0%
during 2021, compared with US and Chinese exports to the EU rising
by 14.3% y/y and 22.6% y/y, respectively, over the same period.
The much-delayed full UK custom controls on EU imports are now
enforced from 1 January 2022, adding to the supply chain
disruptions because of tougher logistical cs industry warned that
even if UK firms get their paperwork in order, they are dependent
on hundreds of thousands of small- and medium-sized (SME) exporting
businesses from across the EU.
Activity is likely to regain momentum temporarily from
mid-2022.
Global supply chain constraints should ease alongside receding
consumer price inflation and corporate cost pressures. In addition,
uncertainties linked to COVID-19 developments should diminish.
Business investment plans are lifted by temporary tax breaks,
which will end in April 2023.
Posted 22 February 2022 by Raj Badiani, Economics Director, Europe, IHS Markit
Gloomier demand outlook and higher interest rates dampened commodity prices last week. Insights from our #MPI:… https://t.co/uUPkt1MWzP
May 13
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