There is no denying that 2022 has been a challenging year globally, with the cost of living growing ever higher with the passing of every week. We now face further challenges with Russia currently under a vast number of sanctions due to their invasion of Ukraine. With Q1 now at an end, it seemed time to reflect on this challenging start to 2022.
2.8 – 3.8%
Expected annual UK real GDP growth
The potential peak in UK inflation
Potential fall in real wages
Although the economy has made good headway following the global pandemic, the impact of the Ukraine conflict is projected to hinder development in the UK and other advanced economies.
The UK economy had comfortably gone above its pre-pandemic level earlier this year, with most sectors of the economy rising. With the unemployment rate falling below 4% and the Bank of England beginning to lift its base rate back to the pandemic level, the UK labour market was booming.
Following on, the conflict has thrown the global economy into disarray, and it is predicted to have three significant effects on the UK economy:
• Financial contagion
• Reduced trade and investment flows
• Increased commodity prices and supply disruptions
Growing commodity prices are expected to have the most significant impact on the UK's economic recovery. The economic impact of financial contagion and trade and investment channels appears to be confined and small so far.
Global economic conditions are likely to remain challenging, with analysts expecting GDP growth in the UK to average between 2.8 per cent and 3.8 per cent this year, down from previous estimates of 4.5 per cent.
Slower household consumption, driven by increased commodity costs, is the key driver of industry analysts' revisions. UK incomes are already declining and are forecast to remain so until the end of this year, with lower-income households bearing the brunt of the impact.
The Consumer Prices Index (CPI) hit a three-decade high of 6.2 per cent in February, four percentage points more than the Bank of England's target inflation rate of 2%. Fuel, food, and power prices accounted for over half of the increase in headline inflation. As the situation in Ukraine adds to existing inflationary pressures, families and businesses should expect further price hikes in the coming months.
Despite these challenging conditions, the UK housing market has continued to climb, with prices setting records at the end of March. With supply challenges still limiting the number of people moving out of the family home, competition for property is fierce. The North West, in particular, is facing some of the highest demand, with Liverpool and Manchester seeing a record number of people moving to the city centre. With entry levels still far more affordable than in London, it's unlikely that the prices in these Northern cities are likely to slow anytime soon.
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