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UK’s economic growth to halve this year says British Chambers of Commerce

UK’s economic growth will halve this year as a result of soaring inflation, hefty tax rises and the destabilising shock from the war in Ukraine, a leading business lobby group has warned.

In the first major forecast of the UK economy since the Russian invasion of Ukraine, the British Chambers of Commerce (BCC) said it expected an inflation rate of 8% to cut disposable incomes in 2022, putting the brakes on the recovery from the pandemic.

In its previous forecast, the BCC expected GDP to expand by 4.2%, but after a wide ranging review it said growth would fall to 3.6% – less than half the 7.5% expansion in national income seen last year.

The BCC said the size of the economy would surpass its pre-pandemic level over the next few months, but was likely to struggle as consumer confidence, which collapsed last month as the full weight of the cost of living crisis became clear, dropped further over the coming months.

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Suren Thiru, head of economics at the BCC, said he now expected inflation to peak at 8% and interest rates to increase to 1.5%, adding to the burden on households and companies, already battered by two years of Covid.

“Our latest forecast signals a significant deterioration in the UK’s economic outlook,” he said.

He described the effects of rising inflation, supply chain disruption and higher taxes as having a suffocating effect on the UK economy that would see growth “run out of steam in the coming months”.

“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,” he said.

The downgrade largely reflects a deteriorating outlook for consumer spending and a weaker than expected rebound in business investment, he added.

Unlike in the US and most other European economies, Rishi Sunak’s attempts to boost investment using tax breaks and subsidies have failed. Last year business investment declined despite the offer of a 130% tax break on spending on new plant, machinery and technology.

Business investment is forecast to grow at 3.5% in 2022, the BCC said. “This is down from the previous forecast of 5.1% and materially lower than the Bank of England’s latest projection of 13.75%.”

The anaemic increases in business investment will mean it remains 6% lower than its pre-pandemic level by the end of 2024. UK exports are expected to remain 13.7% (or £25.5bn) lower than their pre-pandemic level by the end of 2024, reflecting “the impact of post-Brexit trade friction and a weakening global outlook on demand for UK goods and services”.

Consumer confidence fell last month to lows not seen since the third lockdown in January 2021, according to the latest GfK survey.

The BCC said consumer spending would grow in 2022, but at a much slower pace than it forecast last year. It estimated consumers would spend at 4.4% more than in 2021, down from its previous forecast of 6.9%.

Analysts at Bank of America said last week that UK households could suffer the biggest annual decline in their living standards since the 1950s after the sharp rise in energy prices.

With inflation already at the highest rate for 30 years, the analysts said a sustained rise for wholesale oil and gas markets due to the Russian invasion of Ukraine could trigger a drop in household real incomes of 3.1% in 2022 compared with a year earlier – the biggest annual drop since at least 1956, the year of the Suez crisis.

The BCC said it expected inflation to outpace wage growth until the second quarter of 2024, making the squeeze on household finances even worse than the most pessimistic predictions.

Some economists have argued that better off households, who have saved around £220bn during the pandemic, would use those savings to boost spending over the next year, but Thiru said the decline in consumer confidence would “limit households’ willingness to empty their deposit accounts.

By Phillip Inman

Source: The Guardian

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Inflation and supply chain crisis to throttle UK economy, IMF warns

The global supply crunch and roaring inflation will choke UK growth this year, the world’s economic watchdog warned today.

A combination of the supply chain crisis rumbling on and the cost of living corroding Brits’ incomes has prompted the International Monetary Fund (IMF) to downgrade their forecasts for UK economic growth this year to 4.7 per cent from five per cent previously.

Weaker confidence in Britain’s prospects underlines the severity of the inflation spike sweeping across the country.

The Bank of England needs to urgently tighten monetary policy in order to get on top of the soaring cost of living in the UK, the IMF said.

In developed economies “where high inflation runs the risk of becoming entrenched… extraordinary monetary policy support should be withdrawn,” Gita Gopinath, first deputy managing director at the IMF, warned.

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Inflation is running at its highest level in nearly 30 years, hitting 5.4 per cent last month, according to the Office for National Statistics.

Former members of the Bank’s rate setting committee have criticised Threadneedle Street’s inertia as contributing to the cost of living taking off.

Sir Charlie Bean yesterday said the Bank missed an opportunity to combat price rises at the back end of 2021, meaning it will have to launch a cycle of rapid rate hikes to tamp down on inflation.

Some economists expect the Bank to lift interest rates four times this year, taking them to 1.25 per cent by the end of 2022.

Jerome Powell, Chair of the US Federal Reserve, is also widely expected to tell markets to get ready for a rapid tightening of monetary policy this year at the central bank’s meeting of policymakers tomorrow.

Fears that a corrosion in Brits’ living standards caused by soaring inflation will trigger a pull back in consumer spending has ignited a flurry of top City economists to become more downbeat on the UK’s recovery.

Capital Economics, a consultancy, also today dropped their forecasts for UK growth this year to four per cent.

The UK economy is heavily reliant on people spending at services businesses, such as pubs and restaurants, to generate growth, indicating a dip in purchases would whack output.

The IMF downgraded projections for US economic growth this year to four per cent from 5.2 per cent.

EU countries are also expected to grow at a slower pace than first forecast, as is the global economy.

By JACK BARNETT

Source: City AM

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UK economy grows on camping and dining out

The UK economy grew by 0.4% in August as more people dined out, went on holiday and attended music festivals.

The Office for National Statistics (ONS) said the services sector made the biggest contribution to economic growth in the first full month after all Covid restrictions were lifted in England.

It said arts, entertainment and recreation grew 9%, boosted by sports clubs, amusement parks and festivals.

There was also more demand for hotels and campsites.

Restrictions on social distancing were eased from 19 July.

The ONS said the UK economy is now 0.8% smaller than it was before the pandemic.

“The economy picked up in August as bars, restaurants and festivals benefited from the first full month without Covid-19 restrictions in England,” said Darren Morgan, director of economic statistics at the ONS.

“However, later and slightly weaker data from a number of industries now mean we estimate the economy fell a little overall in July.”

The ONS said economic growth fell by 0.1% in July compared with initial estimates of 0.1% growth.

Activity in accommodation and food services rose by 10.3% in August, within which hotels and campsites recorded 22.9% growth.

In travel, air transport and rail both grew in August as Covid-related measures eased, however both industry are still trading far below pre-pandemic levels.

‘Small rebound’

Emma-Lou Montgomery associate director at Fidelity International, said that while August’s growth “marks a small rebound” on July, “the worry remains that economic growth won’t even be in touching distance of pre-pandemic levels until well into next year”.

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She said supply chain disruption risks dampening consumer confidence.

“This all comes in the crucial lead up to Christmas, when suppliers and retailers should be firing on all cylinders,” Ms Montgomery said.”But with households facing steep price rises for everyday items, from the food shop through to the gas bill, there will be little desire – or capacity – to spend, spend, spend.”

Growth in the UK economy – everything produced, from new cars to haircuts to restaurant meals – isn’t at all slow by normal standards at 0.4% in a month. But we’re supposed to be bouncing back with growth of 7% this year.

What’s becoming increasingly clear, is that it’s not a lack of demand for goods and services that’s holding the recovery back but the inability of firms to supply that demand.

A big part of the reason? Shortages. In construction, for example, where business is not growing but shrinking, firms reported to the ONS that they’ve got healthy order books. But they can’t meet more orders, partly because of a shortage of materials in August (for example, wood and steel) and partly because of a shortage of skilled staff.

The ONS reports evidence that the shortage of haulage drivers is slowing down industries from pharmaceuticals to electric lighting. Exports of goods, too, are down by 13% compared with 2018.

Some of these shortages may be due to supply bottlenecks related to the post-pandemic global surge in activity. But without doubt some, notably the ongoing shortage of lorry drivers, are in large part related to Brexit.

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Elsewhere, economic growth was uneven with some sectors hit by shortages of materials. Output in construction fell by 0.2% in August and the sector remains 1.5% below pre-pandemic levels.

The ONS said: “This reflects recent challenges faced by the construction industry from rising input prices and delays to the availability of construction products – notably steel, concrete, timber and glass.”

The manufacturing sector expanded by 0.5% in August following a 0.6% in July. The ONS said growth was led by an increase in vehicle production “as it continues to recover following supply side challenges predominantly caused by the global microchip shortage disrupting car production”.

But it said the output in the manufacture of motor vehicles remains 14.5% below a peak in February this year.

Paul Dales, chief UK economist at Capital Economics, said: “Such drags may have become more widespread and significant in September and October, with the fuel crisis preventing some people from getting to work.”

He said Capital Economics’ activity indicator “suggests that GDP may not have increased at all in September”.

Martin Beck, economist at professional services firm, EY,said: “The recovery is certainly facing more headwinds.

“Rising inflation, driven by significant increases in energy prices, and the recent cut in Universal Credit are squeezing consumers’ spending power.”

Source: BBC

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