Testing times as quarterly growth dries up
Quarterly economic growth is expected to grind to a halt this year before dipping briefly into negative territory as global events continue to weigh heavily on the UK economy.
UK Economic Outlook – 2022
The British Chambers of Commerce has downgraded its expectations for UK GDP growth for 2022 to 3.5% (from 3.6%) against a deteriorating economic outlook. It now expects the UK inflation rate to reach 10% in Q4 2022, comfortably outpacing average earnings growth. The heightened economic uncertainty and rising costs are also expected to significantly weaken business investment, with 1.8% growth predicted in 2022, down sharply from 3.5% in the previous forecast.
Expectations for growth in 2022, at 3.5% are now less than half the 7.5% growth recorded last year. Quarter on quarter GDP is expected to flatline with no growth expected in Q2 and Q3 before contracting by 0.2% in Q4. This negative outlook reflects a combination of soaring inflation, weak business investment, tax rises and the global economic shocks – initially caused by Covid and then compounded by the war in Ukraine. Annual UK economic growth is expected to slow sharply to 0.6% for 2023 before recovering slightly to 1.2% in 2024.
Consumer spending is now forecast to grow at 4% in 2022, a fall from the 4.4% prediction in the first quarter. This reflects the historically high squeeze on real household incomes as inflation far outpaces the forecast 5% growth in average earnings for the year.
Business investment is forecast to grow at 1.8% in 2022, a large downward revision from the previous forecast of 3.5%. The downgrade reflects heightened political and economic uncertainty, and rising cost pressures which are limiting smaller firms’ abilities to invest. The BCC’s survey data for business investment have shown no sign of recovery since the start of the Covid pandemic.
Businesses and consumers face unprecedented inflationary pressures flowing from rising raw material costs, the increase in the energy price cap, and upward pressure on energy and commodity prices. The Consumer Price Index (CPI) inflation rate is expected to reach 10% in Q4 of 2022. This would be the highest since CPI records began in their current form in 1989. CPI inflation is expected to finally fall back to the Bank of England’s 2% target by the end of 2024. At the same time the Bank of England interest rate is expected to rise to 2% in 2022 and 3% in 2023. These represent significant shifts from the 1% and 1.5% rates previously forecast in Q1.
Commenting on the forecast, Alex Veitch, director of policy at the British Chambers of Commerce, said: “Our latest forecast indicates that the headwinds facing the UK economy show little sign of reducing with continued inflationary pressures and sluggish growth. The war in Ukraine came just as the UK was beginning a Covid recovery; placing a further squeeze on business profitability.
“The forecast drop in business investment is especially concerning. It is vital that urgent action is taken here, and we are having constructive conversations with the government about its review of capital allowances and other policies to incentivise business investment.
“With inflation forecast to race ahead of wages, we are concerned about a dip in consumer spending which would further impact businesses and hamper growth. We forecast that if trends continue, inflation will only return to the Bank of England’s target rate at the end of 2024, implying a prolonged period of difficulty for the UK.
“Against this backdrop, the government must put in place stable and supportive policies that help businesses pull the UK out of this economic quagmire. Firms must be given confidence to invest, only then can they drive the growth the economy so desperately needs.”
Key points in the forecast:
- UK GDP growth forecast for 2022 is 3.5%, 0.6% in 2023 and 1.2% in 2024
- Following Q1 2022 growth of 0.8%, quarter-on-quarter GDP growth is forecast to come to a halt with zero growth in Q2 and Q3, before a 0.2% contraction in Q4 2022
- Household consumption forecast is for growth of 4% in 2022, growth of 0.6% for 2023 and 1.2% in 2024
- Business investment forecast is to grow by 1.8% in 2022 before more than halving to 0.8% in 2023, amid the end of the super deduction and the corporation tax rise, and then rising to 1.5% in 2024
- BCC expects export growth of 3% in 2022, 2.3% in 2023 and 1.6% in 2024, compared to import growth of 6.9%, -2.7% and 1.7%
- BCC expects UK unemployment rate of 3.8% in 2022, 3.9% in 2023 and 2024
- CPI inflation is forecast to peak at 10% in Q4 2022, before easing to 3.5% by the end of 2023. Inflation is expected to drop back to the Bank of England’s 2% target by Q4 2024
- UK official interest rates are expected to rise to 2% by Q4 2022 and then to 3% in Q4 2023, ending 2024 at the same level.