A tougher phase for the recovery. (29th January 2022)

• Record Type: Journal Article
• Is Part Of: Economic outlook. Volume 46:Number 1(2022)
• Page Start: 5
• Page End: 9
• Publication Date: 2022-01-29
• Subjects: Economic forecasting -- Great Britain -- Periodicals; Great Britain -- Economic conditions -- 1945-1964 -- Periodicals; 330.94100112
• DOI: 10.1111/1468-0319.12597
• Languages: English
• ISSNs: 0140-489X

Abstract

Abstract : ▪ After enduring one of the deepest downturns in 2020, the UK has enjoyed one of the strongest rebounds in 2021. The 'easy' gains from reopening are behind us, and unprecedented policy support is being withdrawn, so the recovery is now entering a tougher phase. But provided the Omicron Covid variant doesn't result in more serious restrictions, we're sticking to our upbeat view of the UK's prospects for 2022 based on four key themes shaping the outlook. ▪ How consumers and firms treat their excess savings. A lack of spending opportunities has resulted in UK households accumulating excess savings worth 10% of income during the pandemic. Behaviour has been slow to change, but we still expect consumers to dip into this cash pile to fund spending this year. If they don't, squeezed household finances could bring the consumer recovery to a halt. Firms have also accumulated big cash piles and, prompted by the tax super‐deduction, we expect they'll spend some of it. ▪ Inflation fears will calm. Another large rise in the energy price cap and the restoration of the VAT rate for the hospitality sector to 20% are likely to push CPI inflation to almost 6% in April 2022. But we expect it to slow sharply thereafter. There's little evidence of underlying pressures building, commodity prices should fall back, and large, negative, base effects will come into play. ▪ Markets will be disappointed by the pace of rate hikes. Market pricing implies that Bank Rate will be 1% at the end of 2022. This looks too aggressive. With inflation concerns set to ease, we expect Bank Rate to end 2022 at 0.75%. ▪ The threat of a UK‐EU trade war will linger. Negotiations on changes to the Northern Ireland protocol are ongoing. But even if they prove successful, the threat of an UK‐EU trade war is unlikely to go away given the prevalence of strong ideological views in influential parts of the Conservative party.