In which direction will the UK’s economic weathervane blow in 2022?

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January 06, 2022 10:38 am

With the emergence of the Omicron variant leaving the specter of the coronavirus hanging over the country, it’s fair to say that the UK economy is not out of the woods just yet (Photo by Leon Neal / Getty Images)

It’s fair to say that the past two years have been eventful for the UK economy.

The pandemic has changed working practices, supply chains and the monetary policy manual.

With the emergence of the Omicron variant leaving the specter of the coronavirus hanging over the country, it’s fair to say that the UK economy is not out of the woods just yet.

Here are four potential economic scenarios that could unfold in 2022.

Inflation will be around seven percent

A collective sound of grimaces was heard across the UK just before Christmas when the final inflation reading for the year stood at 5.1% – the highest rate in over a decade .

Inflation isn’t going to subside anytime soon, with Goldman Sachs predicting it will hit seven percent (ouch) in April, pushed up by energy regulator Ofgem which raised the price cap.

Consumers tend to react to large upward swings in inflation, which means that if the rate approaches seven percent inflation expectations will strengthen, posing a significant risk of entrenching price increases in the market. the UK economy.

Rising prices will weigh on real household incomes if wages do not follow, which seems highly unlikely.

The Resolution Foundation’s economic think tank estimates that incomes could be cut by a £ 1,200 increase in household bills this year, leading the organization to dub 2022 ‘the year of the squeeze’.

There is an external chance that Chancellor Rishi Sunak will postpone the planned 1.25 percentage point hike in national insurance to April to ease the cost of living.

Bank of England to fight against City opponents

Inflation hovering dangerously close to seven percent will leave the Bank of England warm.

The Bank’s performance last year was marred by the fact that it consistently understated inflation expectations and maintained ultra-loose monetary policy even after price hikes took off around July.

Threadneedle Street’s credibility has taken a hit in some areas of the city due to being so far off the mark on its screenings.

Most people in town will tell you that the Bank has a lot of work to do this year to repair some of the damage to its reputation in 2021, and it could start its charm offensive against opponents by launching a series of price hikes. rate. in February.

Andrew Bailey and his colleagues led the charge against inflation before the end of the year by raising rates for the first time in three years.

But don’t expect the Bank to be left alone this year. Markets have forecast three more hikes in 2022, bringing rates to 1% by the end of December.

Supply chain crisis to rumble

One surprise that emerged in 2021 was that people increased their knowledge of supply chains. Never have so many people been so interested in logistics.

Congestion at U.S. and Chinese ports for much of the past year has been a major driver of the supply chain crisis.

Empty crates have not moved from Los Angeles ports, in part due to years of poor infrastructure investment, leaving America’s logistics system obsolete and, as a result, restricting the flow of goods.

As a result, goods were stuck in Chinese ports due to the scarcity of containers needed to ship them around the world.

Increasing capacity in the shipping industry is a thorny issue that shouldn’t be resolved anytime soon, which means the world’s most important trade routes could remain blocked for months to come. This will leave freight rates at historic highs for much of the year.

Worryingly, the Chinese vaccine appears to be less effective against Omicron, increasing the likelihood of ongoing port closures if Beijing continues to adopt a zero tolerance policy towards Covid-19 in 2022.

Ultimately, consumers will bear the brunt of the global supply network congestion, with companies raising prices to offset higher transportation costs.

The British will not touch the war chests

It has been well documented that the British are sitting on a war chest of savings accumulated during the pandemic.

Throughout the lockdown periods in 2020 and 2021, households funneled money that would otherwise have been spent on vacations and in pubs and bars into bank accounts.

To bring the UK economy back to its pre-pandemic size, the British need to trigger a wave of self-funded spending tapping into this forced savings sink.

However, while wealthier households – who are less likely to spend every extra pound they earn – may have accumulated savings during the pandemic, low-income households have not.

The impending tax hikes and rising energy bills will benefit Britons less, deterring them from unnecessary purchases, casting doubt on when the UK economy will reach pre-crisis size.

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