The UK economy is starting 2022 on the back foot as a record number of coronavirus infections and tighter restrictions driven by the Omicron variant cloud growth prospects.
It comes after a slower pace of growth at the end of last year as businesses and households face increasing pressure from rising energy bills pushing up inflation, as well as shortages of workers and resources. materials. Here are five charts for the UK’s economic outlook for 2022.
GDP
Economic activity has collapsed since the emergence of the Omicron coronavirus variant, with people choosing to be cautious due to high infection rates and renewed government restrictions on growth. Economists warn that a major blow would lead to a decline in gross domestic product (GDP) in the first months of 2022.
It comes with the economy on hand from its pre-pandemic peak, just 0.5% below its February 2020 level in October, despite official figures showing the UK is lagging behind all G7 countries except Japan.
OECD forecasts made before Omicron’s emergence suggested that UK growth would slow from 6.9% in 2021 to 4.7% in 2022.
Previous waves of the pandemic have shown an increasingly weaker impact on GDP compared to the first phase of the emergency, when the economy collapsed by a fifth in a single quarter in the spring of 2020.
However, there is increased uncertainty about the severity of the Omicron, as households and businesses face additional challenges from rising prices and supply bottlenecks, which will also weigh on the market. the economy.
Inflation
UK households and businesses are hit by the highest rate of inflation in a decade, as the fallout from Covid-19 increases the cost of raw materials and causes disruption and delays in global supply chains.
With supply-demand imbalances and energy prices hitting record highs, the Consumer Price Index, a measure of inflation, jumped to 5.1% in November – the lowest rate. highest in a decade. The Bank of England has warned that inflation could peak at around 6% in April – three times its target rate of 2%.
Intense pressure is expected in April when Ofgem raises its price cap on household gas and electricity bills. The energy industry has warned that domestic prices could rise by up to 50%, calling the situation a “national crisis” amid record-breaking costs.
Investors in the city expect the bank to raise interest rates to 1% by the end of the summer to bring inflation under control, the first of several gradual moves from the current rate of 0. , 25% being expected in February.
However, not all economists expect such a steep rise, warning that the economic recovery from Covid-19 may turn out to be weaker than hoped. Threadneedle Street also expects inflation to ease as the Covid disruptions ease.
Income squeeze
Along with high inflation rates, some warnings indicate that the freeze on wage growth and planned government tax hikes will make 2022 “the year of tightening” in a development likely to dominate the political debate.
According to the Resolution Foundation think-tank, the increase in the energy price cap will combine with the government’s new health and social services tax on national insurance and a freeze on the abatement. personal income tax from April, at a cost of £ 1,200 for families.
HSBC economists estimate UK households will experience a 1.7% drop in real incomes this year, given the combined effects of inflation, withdrawal of pandemic support and government tax increases .
“Partly because of this, we are seeing household consumption slow down from here – and end 2022 still below pre-pandemic levels,” said Elizabeth Martins, senior economist at the bank.
Unemployment
Unemployment in Britain continued to fall at the end of last year despite the end of the leave scheme at the end of September, amid record vacancies and severe staff shortages in several sectors of the economy .
Omicron threatens to spike unemployment in the hardest hit sectors, such as hospitality and travel. However, many economists still predict that the unemployment rate will drop in early 2022 to just under 4%, returning to pre-pandemic levels and representing around 1.4 million unemployed.
With the continuing disruption of the labor market, the number of economically inactive working-age adults – those not in the labor market and not looking for work – has increased by nearly 400,000 since start of Covid to reach around 8.7 million.
While the government is keen to highlight an increase in the number of employees on the corporate payroll to 29.4 million, or about half a million above pre-pandemic levels, official figures show that the employment – including self-employment – remains nearly 600,000 below pre-Covid levels. , to about 32.5 million.
Public finances
The UK government is on track to run a budget deficit – the gap between government spending and tax revenue – of £ 183 billion in the fiscal year ended March 2022, according to the Office for Budget Responsibility. Although this is a sharp reduction from a peacetime record of £ 320bn in 2020-2021, it will remain the second highest on record, surpassing the peak reached due to the crisis 2008 financial statement.
As a result, the national debt – the combined total of each deficit – has exceeded £ 2 billion, or nearly 100% of GDP.
Economists have warned that inflation could increase the deficit more than expected over the next few months, due to higher payments on inflation-linked debt as rising interest rates push up service costs for the government. However, economists note that interest payments still remain low by historical standards.
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Chancellor Rishi Sunak has resisted calls to provide more help to struggling companies since Omicron’s emergence and has opposed tighter restrictions on the economy, having insisted in the fall on the fact that the high borrowing levels were “immoral” and arguing that he “would fix the public finances” – comments seen as an argument to bolster his credentials as a potential future Tory leader.