The UK’s economy begins 2022 on shifting sands as Omicron causes COVID-19 infections to hit record highs, while slowing the outlook for growth over the course of the next 12 months.
The latest coronavirus variant slowed the pace of economic growth at the end of 2021, with businesses in the hospitality, leisure and retail sectors suffering from reduced footfall during their busiest trading periods of the calendar year.
Household finances are also coming under mounting pressure as inflation, as measured by the Consumer Prices Index (CPI), continues to push up the costs of living. Rising fuel and energy costs fuelled these costs jumping 5.1% in the 12 months to November 2021 – the highest rate for a decade.
Policymakers at the Bank of England responded by raising the base rate of interest from a record low of 0.1% to 0.25% just before Christmas 2021, although this will make little difference when it comes to inflation increasing further over the course of 2022.
Since the emergence of the Omicron variant, economic activity has slumped, as high infection rates dented consumer confidence.
The retail, leisure and hospitality sectors were particularly affected, as bookings nosedived and consumers shopped online in what’s usually a strong festive trading period for businesses in these sectors.
That said, UK GDP is almost back to its pre-pandemic peak. In October 2021, the Office for National Statistics predicted the economy was just 0.5% below its February 2020 level.
With the CPI’s rate of inflation at 5.1% at the end of 2021, it far outstrips the Monetary Policy Committee’s long-term target rate of 2%. As such, the first of several incremental interest rates increases is already in play.
The Bank of England’s current projections expect inflation to hover around 5% for the majority of winter, before peaking at around 6% in April 2022. It should, however, fall back in the second half of the year.
Intense pressure is forecast in April, when energy regulator Ofgem lifts its price cap on household gas and electricity bills. This could result in domestic prices soaring by 50%, according to industry experts.
Year of the squeeze?
Alongside high rates of inflation, there are fears that stalling wage growth and the increases to National Insurance contributions (NICs) and dividends tax rates could make 2022 the “year of the squeeze”.
Both NICs and dividends tax rates will increase by 1.25% from April 2022 to fund the development of the new health-and-social-care levy, which is due to kick in from April 2023.
On New Year’s Eve, the Resolution Foundation warned that these factors are creating the perfect storm for many low-income households going into the new calendar year.
Hear it from the horse’s mouth
On Tuesday 11 January, we will be hosting a webinar with the Bank of England’s Rob Elder, in which we will discuss the impacts of COVID-19 on the UK economy.