Published: 19 January 2022
Recent data shows that the UK economy regained its pre-pandemic size at the end of November. Overall growth in the UK was around 6.5% last year, though the forecasts for 2022 are around half of that, at 3.5%.
This time last year, markets expected unemployment to peak around 8% in early 2022. In fact, we have seen employment drop over the course of 2021, from the peak at 5.2% in 2020 to the current level of 4.1% in November 2021. The furlough scheme ended without a bang and the majority of those on furlough appear to have been taken back by their employers or found other employment.
Labour shortages and supply chain disruption have had an impact over the course of last year. These have both been feeding into inflation which has hit a new high of 5.4%. Meanwhile, lasting scarring will be felt most severely in the retail, leisure, travel and tourism and hospitality sectors.
The effect of Brexit on the economy has been masked by the disruption from Covid. Changes to requirements for importers which came into force at the beginning of this year are expected to cause more disruption and may increase prices further.
The UK consumer has had a lot to deal with, between the pandemic restrictions and increasing costs. Despite this, the British Retail Consortium reported satisfactory retail sales for the festive period. They have warned about headwinds for 2022. The housing market also saw a challenging year, with the number of mortgage approvals dropping to a 16-month low after the distortion from a stamp duty break. House prices continue to rise, with a 10% increase over the year.
The Conservative Party has spent a significant amount of time in the news over the last few months, with Boris seemingly under constant attack. The Covid response and Plan B enacted by the government seem to have navigated the country through the Omicron wave better than expected. This didn’t stop the Conservatives from suffering a by-election defeat and a rebellion by members of the ruling Conservative party in Parliament. Many of them didn’t even want to go as far as plan B.
The growth we saw last year was above trend but flattered by the rebound from previous lockdowns. It is difficult for the government to have a clear understanding of the pressures facing businesses. The increase in National Insurance could damage business investment and consumer spending once introduced.
The government and media are not expecting further lockdowns, which should allow normality to return. Perhaps we should throw a Party! And this is where Boris may finally come unstuck. With a constant stream of revelations coming out over the last months, even leading to children’s songs, it is difficult to see how he can remain in power. We will have to wait for Sue Gray’s enquiry, We will have to wait for all of the facts…
The supply chain problems will continue to be negatively impacted by raised energy prices and an imbalance of the movement of goods. UK businesses are unlikely to be able to adjust sufficiently to prevent the pass-through of price increases this year. The Bank of England suggested that consumer price inflation will peak at 5% in early 2022, but it could peak higher and remain elevated for longer, already having hit 5.4%.
With these expectations in mind, the Bank of England was expected to raise rates in November, which they didn’t. But in true unforecastable Bank of England style, they did raise rates in December, when fewer were expecting a move. In a real eyebrow-raiser, the Bank of England increased the Base Rate from 0.1% to 0.25%. There had been an assumption that the uncertainty surrounding the Omicron wave would lead them to hold off.
The first increase is now in place with further rate hikes expected through the course of this year. This will depend on the economic recovery, the employment situation and particularly whether inflation remains stubbornly high. Supply chain challenges and Brexit friction may contribute to this. The biggest question is whether rises in interest rates will quell the inflation pressures, which seems unlikely. We also see the UK facing tighter tax conditions, which may be why markets are only forecasting a rise to 0.75% by the end of this year.
The rate has been fairly volatile over the last quarter without breaking any new ground, having oscillated between 1.19 and 1.1550. Given the start of central bank tightening in the UK, the pound has started the year with positive momentum, rising close to 1.20. The forecasts are generally skewed to favour the pound, though a change of heart by the ECB to reduce central bank stimulus would give the euro a boost, if the Covid disruptions of the winter haven’t dented economic growth too much.
The rate has been fairly volatile over the last quarter without breaking any new ground, having oscillated between 1.19 and 1.1550. Given the start of central bank tightening in the UK, the pound has started the year with positive momentum, rising close to 1.20. The forecasts are generally skewed to favour the pound, though a change of heart by the ECB to reduce central bank stimulus would give the euro a boost, if the Covid disruptions of the winter haven’t dented economic growth too much.
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The European Union has had a tough winter so far with Covid restrictions as a result of the Omicron wave. The Economy finished the year strongly with expectations of a positive year, though the ECB may have to take some action on rapidly increasing inflation.
The US has been working on many fronts, internationally with Russia and China, and domestically with an increased fiscal spending plan. The economy has been growing strongly, prompting action from the Fed, though masses of Covid cases may halt the recovery.
Australia has been trying to return to normal with reduced restrictions and higher vaccine rates. It hasn’t been plain sailing, with current Omicron cases at record levels. The economy has been making up ground, with inflation lower than most major economies.
New Zealand is now among a small number of countries with major travel restrictions in place and relatively low levels of Covid cases. With vaccinations now at high levels, there is a path to normalisation with the central bank raising rates as inflation picks up.
The increase in oil and commodity prices has benefitted the loonie somewhat. With the potential for further rises, we could see
further strength in the first part of the year, with inflation and interest rates likely to head higher.
