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UK heads into 2022 with toxic combo of slowing growth and soaring prices

·2-min read
The outlook for the UK economy in 2022 is worse than for 2021 (AFP via Getty Images)
The outlook for the UK economy in 2022 is worse than for 2021 (AFP via Getty Images)

Britain is facing a difficult start to the year as economists predict continued issues with supply chains, rampant inflation and slowing growth.

Experts in the City expect 2022 to be a slower year for the UK economy than last, with activity past the peak of a bounce back seen early in 2021.

“The UK’s rapid vaccine roll-out allowed life to return largely to normal through the summer, boosting the economy,” economists at Bank of America wrote in an outlook note for 2022. “That reopening boost has now likely peaked.”

The private sector is forecasting GDP growth of 4.7% next year, down from around 7% in 2021, though estimates vary widely. Figures compiled by the Treasury show forecasts range from 3.5% to 8.1%.

Still, almost all agree that the UK is losing momentum.

Credit Suisse wrote in its UK outlook: “This slowdown is likely driven by the boost from reopenings fading, labor shortages and supply bottlenecks as well as a moderation of demand.”

Supply chain problems, wage pressure from a tight labour market, and soaring energy prices mean inflation is set to continue well into 2022. Economists expect it to peak around April, in-line with Bank of England forecasts, but not everyone is confident of this timeline. Inflation proved far more persistent than people first thought in 2021 and could prove difficult to curb next year.

Rising prices will be the squeeze on incomes. Bank of America says: “We expect household income to fall 1-2% in 2022.”

Credit Suisse says: “Consumer incomes are likely to be weighed down by rising energy bills and higher inflation, more restrictive fiscal and possibly monetary policy. This means real consumer incomes can fall by about 1.5% in 2022 if high energy prices are sustained.”

Poorer families will feel the pinch the most. S&P Global says: “Lower-income households will feel the pinch from higher inflation most, especially during the winter and into spring. These households had little opportunity to save during the pandemic and now don’t have a buffer.”

The rise of Omicron and possible restrictions to curb its spread cloud the economic outlook too and add to uncertainty. Deutsche Bank expects growth to be negative at the start of the year because of the new variant.

All of this creates a huge headache for the Bank of England. Economists could make the case for both higher and lower rates, though most agree that the case for higher rates to curb inflation is strongest. After the first hike in three years, experts see interest rates at between 0.5% and 1% by the end of 2022.

For companies and consumers alike, that will put more strain on those at the bottom of the ladder who are just getting by. 2022 looks set to be a much tougher year than 2021.

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