OUTPUT
- Over the last three months, concern has shifted from Omicron to the rapid rise in inflation, and a weaker short-term outlook for UK and global economic growth. The UK’s economic output fell by 0.1% in March, following no change in February (revised down from +0.1%). The services sector declined by 0.2% on the month and this was the main contributing sector to the decline (with a large decrease in the wholesale and retail trade). On the other hand, construction sector output rose by 1.7%, while the production sector declined by 0.2%.
- On a quarterly basis, output is still rising, by 0.8% in the three months to March, with the services sector being the main upward contributor. However, it is widely anticipated that this will probably be the high point for GDP growth in 2022.
- The S&P Global / CIPS Manufacturing PMI moved up slightly in April, to 55.8 from March’s 55.3 reading. Delivery delays were cited as having reduced from earlier in the year, while higher production rates were linked with new business intakes. Downward pressure has come from a subdued export market, the war in Ukraine and transportation issues including higher shipping costs and customs checks.
- The UK Services PMI remains in very strongly positive territory at 58.9 in April, but this is well below March’s figure of 62.6, and there are signs that rising costs and the war in Ukraine will limit the pace of growth going forward. New business growth stalled sharply and is the weakest figure this year. Business confidence has also dropped to its weakest level in over 18 months, while input costs rose to their highest rate in the 26 years of this data series.
- The UK Construction index also declined in April, down to 58.2 from 59.1 the previous month. This is still indicative of strong growth in the sector with new orders growing, albeit at their lowest rate this year. Rising material costs, higher borrowing costs and geopolitical uncertainty are all cited as placing downward pressure on future demand.
- The war in Ukraine has severe economic implications both globally and in the UK. In particular, the price of oil and gas, as well as many other commodities, has soared. This will exacerbate the headwinds facing consumers, who were already contending with higher energy prices, as well as April’s increase in National Insurance contributions and rising interest rates. Given the inflationary shock, historically low levels of consumer confidence, ongoing supply chain disruptions, and slower global growth, forecasts for UK growth in 2022 are being revised downwards.
- The HM Treasury-compiled consensus published in December 2021 expected growth of 4.7% for 2022, which has fallen steadily to 3.9% as at May. The Office for Budget Responsibility April) expected 3.8% in its April forecast, compared with the 6.0% it expected in its previous October forecast. Although these 2022 growth projections still sound reasonably strong, most of the growth for this year has already occurred (in January), and in addition, it is comparing this year’s output with the whole of 2021, which suffered significant falls due to the pandemic.
- With economic growth now stalled, and the combined headwinds of inflation, ongoing supply chain issues and a challenging global outlook, the broad picture for the rest of this year is one of relatively flat output but rapidly rising prices, so-called ‘stagflation’. At least one quarter of modestly declining output now appears likely.
LABOUR MARKET
- The UK labour market remains buoyant, despite the economic headwinds. The employment rate rose again to 75.7% in the three months to March 2022, compared with the low point of 74.6% during the pandemic, although still below its pre-pandemic peak of 76.6%. The unemployment rate fell further to 3.7% in the three months to March, its lowest rate in 50 years (since records began).
- The number of vacancies rose again between February and April, to a new record of 1.295 million. Data shows that the pace of vacancy growth may be slowing, but 11 of 18 industry sectors are still displaying record high ratios of vacancies to employed persons. This emphasises the current very tight labour market conditions, resulting from an ongoing mismatch between vacancies and available skills, and the exit from the labour force of more than one million workers during the pandemic.
- Regular pay is lagging behind inflation as wage growth reached 4.2% per annum in the three months to March (excluding bonuses). Adjusted for inflation this means wages fell by 1.2% over the period, as the cost of living continues to squeeze. Job-to-job moves are beginning to slow as consumer confidence falls and employees feel ‘safer’ staying put. As a result, this may be bringing the pace of wage growth down.
INFLATION and interest rates
- Inflation is now a primary concern for the economic outlook. UK consumer price inflation reached 9.0% in the 12 months to April, a significant rise over March’s figure of 7.0% and the highest rate in over 40 years, according to the latest data from the ONS. The sharp rise in energy prices in April were a significant contributor but other increases came from recreational and cultural activities, restaurant and hotel prices, food and non-alcoholic beverages and household goods.
- Global supply chain problems for energy, food, and other commodities are likely to be further stretched by the war in Ukraine. We have seen significant additional price rises in global oil and gas markets since the start of the conflict, and April’s increase in National Insurance is now adding to the pressure (albeit somewhat mitigated by the increase in the National Insurance threshold announced in the Spring Statement). In addition, the value of Sterling has depreciated in recent weeks, further increasing the cost of imported goods.
- In reaction to rapidly rising inflation, the Bank of England’s Monetary Policy Committee (MP) raised Bank Rate in May for the fourth consecutive meeting, by 0.25 percentage points to 1.0%. Three of the nine MPC members voted to raise rates by 0.5 percentage points, and a further rise in Bank Rate in the coming months appear highly likely. There is a clearly a limit to the Bank’s ability to control inflation through monetary policy, as inflation is currently so heavily influenced by global commodity prices. Changes in Bank Rate take time to have an impact, and are aimed more at controlling inflation in the medium term. The next MPC meeting will take place on 16th June.
- A key question is whether higher inflation will become entrenched or fall back relatively quickly. The Bank of England’s central outlook is for inflation to increase further, peaking at 10.2% in Q4 this year, before falling back to 3.6% in Q4 2023 and reaching the 2% inflation target by Q2 2024. The current consensus view is 7.8% by Q4 this year (see table).
- There are clear risks around this inflation outlook. For example, higher inflation expectations in the current tight labour market could lead to a wage-price spiral, or Russia could disrupt gas supplies to more European countries, further increasing prices.
|
2022 |
2023 |
5 year average (2015-2019) |
GDP growth |
3.9% |
1.3% |
1.8% pa |
CPI inflation |
7.8% |
2.8% |
1.5% pa |
Unemployment rate (LFS) |
4.0% |
4.1% |
4.6% |
Employment growth |
0.9% |
0.7% |
1.2% pa |
Private consumption |
4.5% |
1.1% |
2.3% pa |
Source: HM Treasury compilation of independent forecasts, April 2022 (forecasts); ONS, Experian, Carter Jonas (last 5 years)