Inflation ‘going to get worse’ warns Sir John Gieve
We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info
Despite fears of an Omicron shaped dent in growth the UK economy proved resilient in the final months of 2021 with GDP remaining at one percent, according to Office for National Statistics data. Overall the headline figures have appeared encouraging with an annual rise of 7.5 percent, following the lockdown driven decline of 9.4 percent in 2020. Despite 2021’s resilience though business groups and economists are urging caution that the figures do not reflect the day to day reality on the ground in Britain for both consumers and businesses. Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), said: “Although 2021 was a record year for the UK economy, this more reflects data distortions caused by the comparison with the historic collapse in activity in 2020, than the reality on the ground. The UK economy is facing a materially weaker 2022 as the crippling burden of rising inflation, soaring energy bills and higher taxes on consumers and businesses dampens activity, despite a temporary boost from the lifting of Plan B restrictions.”
Brian Reading, an economist who previously served as Economic Adviser to Edward Heath, told Express.co.uk the BCC was right to take this view, warning that the sort of cost-push inflation the UK is now seeing generally leads to “higher unemployment and a recession by squeezing profits (and) consumer spending.”
According to Mr Reading a missing part of the analysis was the size and distribution of UK income.
He explained the data pointed to a 12.6 percent loss in income in the final quarter of 2021 compared to the same time in 2019 before the pandemic.
While income loss has been driven by the pandemic, workers in 2022 are increasingly seeing income eroded by inflation.
Mr Reading commented: “Supply chain and energy price inflation losses are inflationary transfer losses.
“The consumer pays more to buy less, the producer sells less but earns more.”
While the overall figure for GDP for the year showed growth, a lot of attention has focused on the most recent data which showed a -0.2 percent fall in growth in December.
Rain Newton-Smith, Chief Economist at the Confederation of British Industry, said: “The UK economy saw a lacklustre end to the year hit by the emergence of the Omicron variant and Plan B restrictions.
“While the worst of the impact appears to be over, firms are still grappling with supply shortages and cost pressures, while households are facing a looming cost of living crisis.”
Although many businesses are putting Covid behind them a new threat from soaring inflation and particularly rising energy costs and wage bills is putting a major strain on firms.
Yesterday data from the British Chambers of Commerce revealed three in four firms were passing on rising costs to consumers in a sign of inflation becoming more embedded in the economy.
Thomas Pugh, an economist at consultancy RSM, suggested the cost of living crisis could have a bigger impact on growth than Omicron.
He explained: “Inflation and tax rises mean households’ real incomes will fall by the largest amount in three decades in 2022, which will put a big dampener on their confidence and their ability to go out and spend.”
Inflation is now expected to peak at around 7.25 percent in spring.
April will also see a rise in the energy price cap and National Insurance, denting consumer spending power and piling further pressure onto businesses already struggling to balance the books.
The impact of inflation on growth was seen in the Eurozone yesterday with the European Commission downgrading forecasts for 2022.
Inflation has been a major problem across Europe with Germany seeing prices rise at their fastest rate in nearly three decades.
UK firms to hike prices further [ANALYSIS]
Eurozone crisis as growth forecast cut [SPOTLIGHT]
BA breakup could be forced by EU [REVEAL]
Germany meanwhile has seen GDP growth at only 2.7 percent for 2021 with disruption to supply chains playing havoc with manufacturing output.
Over in the US growth has proved slightly stronger with GDP expanding 5.7 percent in 2021, however inflation remains a major issue here, revealed yesterday to have hit 7.5 percent in January.
Attention is now focused on central banks as to what direction monetary policy will go in next.
The Bank of England last week made its second of two consecutive interest rate hikes, the first time it has done this since 2004.
Markets are largely expecting further hikes to come with predictions interest rates could reach as high as two percent next year, though it is suggested weak growth could force the Bank to review this.
US central bank the Federal Reserve has yet to raise interest rates but is widely expected to carry out several hikes this year.
The European Central Bank meanwhile has steered clear of any hike so far however its position has been increasingly challenged from member states, particularly Germany.
Source: Read Full Article