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UK economy to shrug off Omicron quickly but lean into inflation blizzard

The UK economy will shrug off the impact of the Omicron variant quickly, but will then fall into an inflation blizzard, top City economists have bet.

Despite widespread concerns the new strain would plunge the economy back into doldrums seen during previous periods of high virus cases, the impact of the Omicron variant will be mild.

Covid-19 cases are seemingly peaking in London, the capital’s health chief said this week, in a sign that the UK government’s decision to stick to plan B has paid off.

The likelihood of further curbs on daily life being introduced has receded significantly, igniting a string of bullish assessments from top City experts on the UK economy’s prospects.

“The worst of the Omicron wave now is behind Britain,” said Smauel Tombs, chief UK economist at Pantheon Macroeconomics, adding he now expects plan B measures to expire at the end of January.

The UK economy has snapped back sharply after previous waves of the virus have filtered through the country, indicating output will propel higher beyond January. Pantheon have hiked their forecasts for UK economic growth for the first three months of the year to 0.2 per cent from zero.

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Andrew Goodwin, chief UK economist at Oxford Economics, said: “With Omicron rapidly moving through the population, this wave should prove short-lived.”

“Activity is likely to rebound strongly as case numbers fall, so GDP should return to pre-Omicron levels in early spring.”

“Restrictions now look likely to be soft in scale and shorter in duration, with the economy potentially reversing restrictions over the next month,” said Sanjay Raja, senior economist at Deutsche Bank, said:

Most in the City now think the economy will hit pre-pandemic strength in the first half of 2022.

In a sign that Britain’s recovery was already steaming ahead before the emergence of Omicron, Friday’s GDP print is expected to come in strong.

Analysts at investment bank Deutsche Bank are pencilling the economy to expand 0.4 per cent in November, up from 0.1 per cent in October, driven by a rise in consumer spending.

However, the soaring cost of living is now seen as the number one risk to derailing Britain’s recovery among experts.

“It’s highly unlikely that pay will keep pace with price gains for most (if not all) of this year. That will cap consumer spending growth,” warned James Smith, developed market economist at ING.

Some experts in the City think inflation could top seven per cent this April, led higher by the energy watchdog, Ofgem, hiking the cap on energy bills 50 per cent.

By JACK BARNETT

Source: City AM

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UK Economy Looks Forward to a February Bounce-back

The UK economy will shrink during the months of December and January but looks set to rebound in February, according to new research.

Analysis from independent economic and financial research provider Capital Economics finds GDP could fall by as much as 1.0% during December and January, even if further restrictions are not introduced by the government.

“We aren’t factoring in any additional UK-wide restrictions, but we still expect increased consumer caution and self isolations to weigh on economic activity in the first quarter,” says Adam Hoynes, Assistant Economist at Capital Economics.

Prime Minister Boris Johnson on January 04 said the UK would likely see out the Omicron wave of infections without the need for further restrictions, while it was confirmed by Cabinet on Wednesday that existing Plan B measures would be maintained.

The economic costs of existing Plan B restrictions when combined with voluntary caution and self-isolation are however likely to prove significant.

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“We now think that GDP will fall by around 1% over December and January together,” says Hoynes. “The number of people forced to self-isolate is becoming increasingly disruptive.”

Data from the ONS showed the spread of Omicron was met with a decline in card spending, mobility and internet searches related to social activities during December, raising expectations or a sharp drop in economic activity.

“Consumer caution in response to Omicron points to a near-1% fall in GDP between November and January,” says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

Further constraints to output in all sectors will come amidst a surge in the numbers of people having to self-isolate, having caught the virus.

To highlight the sale of the current infection wave, the ONS said on January 05 that 1 in 10 people in London had Covid in the week ending December 15. 1 in 15 in England had the virus, 1 in 20 in Wales, 1 in 25 in Northern Ireland and 1 in 20 in Scotland.

Health minister Gillian Keegan said on January 05 that “around a million people are now self-isolating”.

The impact on businesses is significant, a point highlighted by Iceland Managing Director Richard Walker who said 11% of their workforce were now self-isolating.

“The number of people forced to self-isolate is becoming increasingly disruptive,” “it it appears that the recent surge in positive cases is beginning to offset the relaxed isolation rules,” says Hoynes.

Pantheon Macroeconomics anticipate output in the accommodation and food services sector to have fallen by about 15% month-to-month in December with a further 5% fall to come in January.

They assume output in the arts, entertainment and recreation sector dropped by 10% in December and will fall by a further 5% in January.

Output in the transport sector is anticipated to have declined by 3%, and will drop by a further 3% this month.

Covid cases in London look to have peaked already in what amounts to a potential precursor to a peaking in other regions across the UK in January.

This suggests February could see substantive easing in pressure on businesses and consumer activity can recover.

Capital Economics expects economic growth losses suffered in December and January to be recouped in February and March, “if Omicron cases fall as fast as they rose”.

Pantheon Macroeconomics says Omicron appears to be dealing a substantial blow to economic activity at the turn of the year, “but the good news is that GDP should be rising
again in February”.

“In Q2, GDP should be close to the level it would have reached, had the new variant not emerged,” says Tombs.

Written by Gary Howes

Source: Pound Sterling Live

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Omicron fears set in at British firms as UK economy hurtles toward contraction

Omicron fears are embedding into British businesses in a sign that the UK economy is headed for a period of contraction, reveals a new study released today.

Business confidence dropped to 32 per cent in early December, down from 40 per cent in just a matter of days from late November, according to Lloyds Bank.

Intensifying uncertainty over the trajectory of the UK economy in the coming months due to the likelihood of the UK government tightening curbs on daily life ratcheting up to cool the spread of Omicron ignited the dip in confidence.

Several British media outlets reported yesterday Prime Minister Boris Johnson is set to re-launch the government’s step two in its roadmap that guided the country out of lockdown last year.

If triggered, indoor household mixing would be prohibited and pubs, bars and restaurants would be limited to serving customers outdoors.

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There is concern over the scale of damage a return to step two would inflict on the British economy. Pantheon Macroeconomics, a consultancy, estimates output would drop two per cent.

Hann-Ju Ho, senior economist at Lloyds Bank, said:“It is a challenging end to 2021 as businesses are now having to adapt to the new Omicron variant and resultant restrictions across the UK.”

The potential reimposition of restrictions on economic activity adds to the list of headwinds troubling British firms.

Inflationary pressures have swelled over the course of 2021, squeezing margins and making profitability distant reality for many businesses.

Input prices are over 14 per cent higher than they were a year ago, according to the Office for National Statistics.

In a big to survive the inflation onslaught, 45 per cent of firms intend to hike price over the next 12 months, according to Lloyds. Price rises are most acute in the hospitality sector.

“Pay expectations continue to show strength, reaching new highs of 48 per cent and 26 per cent for firms expecting average pay growth of 2 per cent and 3 per cent respectively,” Lloyds said.

More than one in 10 businesses anticipate hiking pay four per cent.

By JACK BARNETT

Source: City AM

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Severity of Omicron to determine UK economy’s fate, analysts warn

The severity of the Omicron variant will determine the strength of the UK’s economic recovery from the pandemic over the coming year, according to City economists.

The British economy could reach its pre-pandemic size by the third quarter of next year if the new strain of coronavirus proves to be less deadly than first thought, economists at KPMG have predicted.

In the consultancy’s best case scenario, in which no further restrictions on economic activity are needed to curb the spread of Omicron, the UK economy will grow 4.2 per cent in 2022 and 2.2 per cent in the following year.

Although growth could be tempered by an initial hit to consumer spending due to Brits becoming “more worried about catching the new strain of the virus… spending patterns could be restored if the milder nature of the virus is confirmed by the end of the year,” KPMG said.

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The bullish predictions mirror those made by the business lobby group the Confederation of British Industry (CBI), who expect the economy to expand 6.9 per cent this year and 5.1 per cent next. These new projections are, however, downgrades from the CBI’s previous forecasts, underlining the damage supply chain issues have inflicted on confidence in the recovery.

Consumers are set to drive economic growth, with spending surging 7.6 per cent next year. Household spending will generate around 90 per cent of growth in 2022, according to the CBI.

However, ongoing supply chain breakdowns caused by demand for goods staying elevated and roaring inflation present significant headwinds to the recovery, both organisations warned.

“A turn to the worse in Covid-19 cases could see more disruption to ports and logistics in the short-term, putting upward pressure on goods prices,” KPMG added.

Even if no further restrictions are imposed over winter, inflation will hit 5.8 per cent next spring, KPMG said. The CBI expects the rate to scale to over five per cent as well, a warning that will agitate officials at the Bank of England.

The Old Lady has come under intense pressure to get a handle on inflation running wild in the UK.

Prices are rising at their fastest pace in nearly a decade, scaling 4.2 per cent in the year to October.

The Bank will announce its latest decision on interest rates on December 16.

The City was adamant the Old Lady would hike rates this month.

However, the emergence of the Omicron variant has clouded the outlook for the UK economy, prompting analysts to rein their bets on a first rate rise in three years.

Experts are already painting a bleak picture of whether the economy can withstand a reintroduction of lockdown measures.

In KPMG’s worst case scenario in which Omicron evades vaccines, the UK will squeeze out anaemic growth of 1.8 per cent.

Meanwhile, an upsurge in case rates in South Africa driven by the rapid spread of the new strain has sparked experts to redraw their projections for the year ahead.

Goldman Sachs has revised down its forecasts for US growth due to the variant “slow[ing] economic reopening,” the Wall Street giant said in a research note.

By JACK BARNETT

Source: City AM

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