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UK braced for more economic gloom amid rising inflation and falling investment

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Britain faces more economic gloom as growth for 2022 is revised down amid surging inflation. Photo: Guy Smallman/Getty images
Britain faces more economic gloom as growth for 2022 is revised down amid surging inflation. Photo: Guy Smallman/Getty

The UK is braced for more economic gloom as geopolitical events, soaring prices and a reduction in business investment continue to weigh heavily on growth.

In its latest analysis, the British Chamber of Commerce (BCC) said it anticipates the economy to grind to a halt this year before dipping briefly into negative territory.

Quarter-on-quarter gross domestic product (GDP) is forecast to flatline with no growth expected in the second quarter and Q3 before contracting by 0.2% in the fourth quarter.

UK GDP growth for 2022 was downgraded to 3.5% from 3.6% against a deteriorating economic and political outlook. This is nearly half the 7.5% growth recorded last year.

Annual economic growth is expected to slow sharply to 0.6% next year before recovering slightly to 1.2% in 2024.

This negative outlook reflects a combination of surging inflation, weak business investment, tax rises and the global economic shocks — initially caused by COVID and then compounded by the war in Ukraine.

Read more: UK on brink of recession amid warning of weakest economic growth of developed world

The heightened economic uncertainty and rising costs are also expected to significantly weaken business investment, with 1.8% growth predicted for this year, down sharply from 3.5% in the previous forecast.

BCC’s survey data for business investment shows no sign of recovery since the start of the pandemic as costs pressures reduce small firms' ability to invest.

The group now expects the Consumer Price Index (CPI) inflation rate to reach 10% in Q4 of 2022, comfortably outpacing average earnings growth.

This would be the highest since CPI records began in their current form in 1989 due to the increase in the energy price cap, raw material costs as well as rising energy and commodity prices.

CPI is predicted to drop back to the Bank of England’s 2% target by the end of 2024. Threadneedle Street's interest rate is expected to rise to 2% in 2022 and 3% next year, a significant shift from the 1% and 1.5% forecast in Q1.

Read more: UK firms' growth to 'flatline' as cost of living crisis bites

Consumer spending will also take a hit, with growth at 4% in 2022, a fall from the 4.4% prediction in the first quarter, reflecting the historically high squeeze on real household incomes as inflation far outpaces the forecast 5% growth in average earnings for the year.

Alex Veitch, director of policy at the BCC, said: "Our latest forecast indicates that the headwinds facing the UK economy show little sign of reducing with continued inflationary pressures and sluggish growth.

"The war in Ukraine came just as the UK was beginning a COVID recovery; placing a further squeeze on business profitability.

"The forecast drop in business investment is especially concerning. It is vital that urgent action is taken here, and we are having constructive conversations with the government about its review of capital allowances and other policies to incentivise business investment.

"With inflation forecast to race ahead of wages, we are concerned about a dip in consumer spending which would further impact businesses and hamper growth."

Watch: What is a recession and how do we spot one? 

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