UK economic growth is expected to halve this year amid soaring inflation, major tax rises, and global shocks – including Russia’s invasion of Ukraine.
UK Economic Outlook – 2022
The British Chambers of Commerce has downgraded its expectations for UK GDP growth in 2022 to 3.6%, from 4.2% in its previous forecast in December 2021 and less than half the growth of 7.5% recorded last year. The downgrade largely reflects a deteriorating outlook for consumer spending and a weaker than expected rebound in business investment:
- Consumer spending is forecast to grow at 4.4% in 2022, 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. Weakening consumer confidence is expected to limit households’ willingness to support spending by running down savings built-up during Covid.
- Business investment is forecast to grow at 3.5% in 2022. This is down from the previous forecast of 5.1% and materially lower than the Bank of England’s latest projection of 13.75%(1). The downgrade reflects the 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.
Inflation and Interest Rates
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. CPI inflation is now expected to fall back to the Bank of England’s 2% target in Q4 2024, over a year later than the previous forecast of Q2 2023.
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 do little to curb further increases in inflation.
Following forecasted GDP growth of 3.6% this year, UK economic growth is expected to slow sharply again to 1.3% in 2023, before easing to 1.2% in 2024 amid the limit on activity from the cost-of-living squeeze, weak business investment and sluggish export growth.
The BCC’s latest outlook also projects that a legacy of the pandemic, and the ongoing issues with the UK’s trade deal with the EU, is a more unbalanced economy with business investment and trade lagging the wider recovery:
- Rising cost pressures, higher national insurance and corporation tax rates and a weakening UK outlook are expected to continue to weigh on firms’ investment plans. Consequently, business investment is forecast to remain 6% lower than its pre-pandemic level by the end of the forecast period in Q4 2024.
- UK exports are forecast to remain 13.7% (£25.5 billion) lower than their pre-pandemic level by the end of the forecast period in Q4 2024. This reflects the impact of post-Brexit trade friction and a weakening global outlook on demand for UK goods and services.
In contrast, consumer and government spending are projected to be 2.4% and 12.2% higher respectively at the end of the forecast period than their pre-pandemic level.
Commenting on the forecast, Suren Thiru, Head of Economics at the British Chambers of Commerce, said:
“Our latest forecast signals a significant deterioration in UK’s economic outlook.
“The UK economy is forecast to run out of steam in the coming months as the suffocating effect of rising inflation, supply chain disruption and higher taxes weaken key drivers of UK output, including consumer spending and business investment.
“Russia’s invasion of Ukraine is likely to weigh on activity by exacerbating the current inflationary squeeze on consumers and businesses and increasing bottlenecks in global supply chains.
“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.
“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 UK’s growth prospects further by undermining confidence and damaging households’ and firms’ finances.”
Responding to the forecast, Hannah Essex, Co-Executive Director the British Chambers of Commerce, said:
“Our downgraded projections for the UK economy highlight the critical challenges facing business communities and households against the backdrop of the growing uncertainty surrounding both the UK and global economy.
“Coming hot on the heels of two years of a pandemic-induced squeeze on cashflow and investment plans, it is clear Government must do more to support UK business and the wider economy.
“We urge the Chancellor use this month’s Spring Statement, to tackle the cost-of-doing-business crisis by implementing our five-point plan. This includes delaying the National Insurance rise, introducing a temporary energy price cap for smaller firms to protect them from energy price rises, and committing to no further policy measures that will increase costs for business for the remainder of this Parliament.
“We also need a cast-iron commitment from the government’s Supply Chain Advisory Group and Industry Taskforce to continue to work with firms to urgently deliver practical solutions to ease the supply and labour shortages that continue to drive the upward pressure on prices.”
Key points in the forecast:
- UK GDP growth forecast for 2022 is 3.6%, 1.3% in 2023 and 1.2% in 2024
- Following Q4 2021 growth of 1.0%, quarter-on-quarter GDP growth forecast to slow to 0.7% in Q1 2022, then to 0.2% in Q2 and 0.1% growth in Q3
- Household consumption forecast is for growth of 4.4% in 2022, growth of 1.3% for 2023 and 1.2% in 2024
- Business investment forecast is to grow by 3.5% in 2022 before halving to 1.6% in 2023, amid the end of the super deduction and the corporation tax rise, and slowing again to 1.5% in 2024
- BCC expects export growth of 4.2% in 2022, 1.6% in 2023 and 1.6% in 2024, compared to import growth of 4.7%, 1.6% and 1.5%
- BCC expects UK unemployment rate of 4.0% in 2022 and 2023, before easing slightly to 3.9% in 2024
- CPI inflation is forecast to peak at 8.0% in Q2 2022, before easing to 5.5% by the end of the year. Inflation is expected to drop back to the Bank of England’s 2% target in Q4 2024
- UK official interest rates are expected to rise to Q3 2022 to 0.75%, then to 1.00% in Q4 2022, ending the forecast period at 1.50%