Yahoo Finance War and inflation to halve UK's economic growth, says BCC
The Ukraine war and soaring inflation is set to halve the UK’s economic growth this year, new data has shown.
The British Chamber of Commerce (BCC) has downgraded its expectations for UK GDP growth in 2022, from 4.2% in its previous forecast in December to 3.6%.
This is less than half the growth of 7.5% recorded last year, reflecting the poor outlook for consumer spending, and a weaker than expected rebound in business investment.
Consumer spending is now forecast to grow at 4.4% this year, down from its previous forecast of 6.9%.
“The downgrade reflects the historic squeeze on real household incomes from high inflation. Inflation is projected to outpace wage growth until Q2 2024, maintaining the squeeze on household finances,” the BCC said.
“Weakening consumer confidence is expected to limit households’ willingness to support spending by running down savings built-up during COVID.”
Read more: BoE: UK businesses' inflation expectations climb to record high
Business investment is also forecast to grow at 3.5% in 2022, down from the previous forecast of 5.1% and materially lower than the Bank of England’s (BoE) latest projection of 13.75%.
This highlighted an expected weakening in investment intentions from rising cost pressures, higher taxes and weakening confidence amid deteriorating UK and global outlooks, including the current impact of Russia’s invasion of Ukraine.
It comes as consumer price inflation in the UK came in at 5.5% in December, before Russia’s invasion of Ukraine pushed energy prices even higher.
The inflation rate is currently more than double the Bank of England’s (BoE) 2% target. It is expected to reach 7.25% by springtime, when energy bills jump in April, and the chancellor’s tax rises come into place, before starting to come down.
However, the BCC said that rising raw material costs, the increase in the energy price cap, the reversal of the hospitality VAT cut and upward pressure on energy and commodity prices from the impact of Russia’s invasion of Ukraine are expected to lift CPI inflation to a peak of 8% in Q2 2022.
If realised this would be the highest rate since July 1991. The impact of the invasion and rising raw material costs are also projected to keep UK inflation higher for longer.
Read more: What higher inflation means for savers and investors
The surging cost of living is raising expectations that Threadneedle Street will further hike interest rates at its next meeting in March.
In December, the BoE became the first major central bank to lift borrowing costs from record lows of 0.1% to 0.25%. In February it doubled the rate from 0.25% to 0.5%, the second increase since the start of the pandemic, and the first back-to-back hike since 2004.
“UK interest rates are projected to double over the course of this year, from 0.5% to 1%. However, with the current inflationary spike mostly driven by global factors, higher interest rates are expected to do little to curb further increases in inflation,” the BCC said in its report.
In the long-term, business investment is forecast to remain 6% lower than its pre-pandemic level by the end of the forecast period at the end of 2024, while UK exports are forecast to remain 13.7%, or £25.5bn ($34.1bn), lower than their pre-pandemic level.
“Our latest outlook suggests a legacy of COVID, and Brexit, is an increasingly unbalanced economy with a growing reliance on household spending to drive growth. Such economic imbalances leave the UK more exposed to economic shocks and reduces our productive potential,” Suren Thiru, head of economics at the British Chambers of Commerce, said.
“The downside risks to the outlook are increasing. Russia’s invasion of Ukraine could drive a renewed economic downturn if it stalls activity by triggering a sustained dislocation of supply chains or a more significant inflationary surge.
“Tightening monetary and fiscal policy too aggressively risks weakening the UK’s growth prospects further by undermining confidence and damaging households' and firms' finances.”
Watch: How does inflation affect interest rates?
