Outlook for 2022 economy sours

The economic outlook for 2022 has soured, following a revision to the British Chambers of Commerce (BCC) forecast.

The BCC expects the UK economy to grow by 3.6%, revised down from its previous forecast of 4.2% and less than half the growth of 7.5% seen in 2021.

It said its downgrade largely reflects a deterioration in consumer confidence and weak business investment amid rising inflation and the war in Ukraine.

It predicts GDP growth to slow sharply to 1.3% in 2023 before easing to 1.2% in 2024.

Meanwhile, CPI could peak at 8% in Q2 2022 and outpace wage growth - significantly higher than the Bank of England's own forecast of 6.2%.

The Resolution Foundation similarly predicts CPI inflation could peak at 8.3% in Spring.

Inflation will then fall back to the Bank of England's 2% target in Q4 2024, over a year later than the previous forecast of Q2 2023.

Impact of inflation

CPI inflation is the average increase of goods and services in the UK and risks wiping individuals' wage gains if it outpaces the average rate of wage growth.

The Resolution Foundation expects exactly that to happen, causing typical real household incomes to fall by 4% in 2022/23 - equivalent to £1,000 per household.

These figures take into account the £350 boost to incomes that the Government's energy rebate package will provide for most households, which it introduced to help them cope with rising energy costs.

Most working age benefits and the state pension are due to rise by 3.1% in April, which would also mean a real-terms cut in the value of benefits by £10 billion if inflation hits 8%.

Adam Corlett, principal economist at the Resolution Foundation, said:

"For millions of low-and-middle-income families, this inflation-driven squeeze will be made worse by a living standards rollercoaster.

"The immediate priority should be for the Chancellor to revisit benefits uprating in his upcoming Spring Statement."

Too soon to write off economic recovery?

According to the latest GDP figures from the Office for National Statistics, GDP grew by 0.8% in January 2022 after a 0.5% contraction in December 2021.

Commenting on the GDP data, Julian Jessop of the free market think tank Institute of Economic affairs, said:

"It is too soon to write off the economic recovery. The UK economy at least started the year with plenty of positive momentum.

"In an ‘upside' scenario, with a quick end to the Ukraine crisis, rapid falls in energy prices and a strong rebound in business investment, GDP could still grow by about 5.5 per cent in 2022."

However, the Russo-Ukrainian war shows limited signs of deescalating, while demand for gas is not expected to drop significantly any time soon.

National Insurance contributions are set to rise by 1.25 percentage points in April 2022, which will also bring about the highest UK tax burden in 70 years.

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