March GDP data signals that economic activity is losing steam as the cost of living crisis begins to bite. With a bigger squeeze still to come, the spectre of stagflation looms large and unwanted attention is falling on the Bank of England over untamed inflation. Worries are certainly mounting, with China’s strict lockdowns weighing on global trade and April’s inflation figures – the first to include the 54% energy price cap jump – expected to show another sharp rise.
As central banks around the world tightening monetary policy, our own Bank of England warned that the UK economy could enter a recession. Yet inflationary pressure continue to build; the G-7 countries pledged on Sunday phasing out or banning the import of Russian oil (the EU, US and UK made similar announcements before). Meanwhile Northern Ireland’s electorate waits to see when / if Stormont’s Executive can be restored. After all, there are no shortage of difficult issues to get stuck into.
Weaker than expected Euro area growth, unexpected contraction of the US economy and concerns about the Chinese economy, clouded the outlook last week. In the week ahead, the Bank of England is facing the toughest balancing act between curbing recent record high inflation and not weighing too heavily on GDP growth amid a cost-of-living crisis.
Disappointing economic data for the UK economy last week: declining retail sales, weakening PMI surveys and falling consumer confidence. To add to that, new projections from the IMF suggest that the UK would have the slowest growth in the G7 in 2023. Weak economic data underlines the balancing act facing the Bank of England, bringing inflation back to target while preserving the recovery.
The two hallmarks of the economic outlook remain in focus: slower growth and higher inflation. UK inflation hit a 30-year high. But that was surpassed in the US where it hit a 40-year high. While China’s latest lockdown is adding to supply chain stress, driving prices even higher, and contributing to jitters around the global recovery. So too is the war in Ukraine, as the latest forecasts from the World Bank suggest.
Global food production is coming under severe stress as war in Ukraine adds to pandemic-related shocks. Meanwhile, countries also need to curb dependence on fossil fuels, as the UK government outlined its energy strategy putting offshore wind and nuclear power at the centre of policy. Businesses are grappling with challenges from surging prices to supply chain disruptions and, with inflation rates probably jumping again this week, that will likely continue to be the case.
April brings an acute squeeze on UK living standards with households facing a 54% rise in energy bills. And that’s far from the end of it. Higher national insurance contributions also start this month. And that’s with inflation already at a 30-year high! Hard to find good news amidst all that. But if there’s some it’s that momentum leading up to the squeeze is a little better than thought: GDP rose 1.3% in the final quarter as opposed to 1% as initially estimated.
The UK economy continued its robust recovery from the pandemic and tax revenues remained strong. However, good news on the public purse have been matched with challenging news for household finances as cost-of-living crisis unfolds. The chancellor announced some support measures with cuts to national insurance and fuel duty, but this won’t offset the projected drop in standards of living.
Things are going up lately, from inflation, interest rates, energy prices, while covid cases also ticked up. Last week central banks addressed the most important feature of the post-pandemic era, rising inflation, while also acknowledging the hit to growth as a consequence of the war in Ukraine. US Federal reserve announced its first interest rate increase since 2018, and Bank of England completed the third consecutive hike. This week is Chancellor Rishi Sunak’s turn, who is under pressure to use his spring statement to help alleviate the cost-of-living crisis.
There’s no doubt the war in Ukraine has clouded the economic outlook. Commodity prices have soared following Russia’s invasion putting more pressure on households’ real disposable income, and dampening growth prospects. But there’s real momentum behind the UK recovery going into this more challenging period, as underlined by last week’s estimate-beating GDP data for January.
