• PARLIAMENT NEWS

The Shaping of the UK Economy After the Pandemic


Following the uplift of lockdown restrictions, a V-shaped recovery of the UK economy was

the optimistic expectation shared by many, however, the data suggests otherwise.

1- Cautious Consumers:

The Consumer Confidence Index is an economic indicator which measures the degree of

optimism of consumers. It is a leading indicator of how an economy is performing, increased

consumer confidence indicates higher consumption and economic growth.

"The Consumer Confidence indicator fell to a record low of -44 in August 2022 from -41 in

July 2022, hitting a new record low and exceeding expectations for a drop to -42, as British

households continued to grapple with the surging cost of living"[Trading Economics]


.Fig 1: GFK Consumer Confidence Indicator Chart

The Consumer Confidence Index has now been at a record low for four successive months.

The index remaining at such historical lows for such a period is a clear indication of how

cautious consumers are in spending their money, which subsequently affects businesses as

they start to experience a decrease in demand, thus fewer sales.

2- The FTSE 100 largest drop since 1987:

During the first 3 months of 2020, the stock market sees a plunge of 25% from the start of

the year. The FTSE 100, has not been able to break above its pre-pandemic high yet, the

recovery has been slow and certainly not V-shaped.

The FTSE 100 constituents include major airlines such as Easyjet (75% drop in share prices)

and the International Consolidated Airlines with British Airways as a subsidiary (80% drop in

share price). These companies were tremendously affected by the pandemic, and with no


sign of recovery to this date, the share prices have dropped lower than the levels traded

during the pandemic.

Oil companies have also taken a major hit during the pandemic period, with oil prices

dropping from 70$ to 20$ a barrel. Even though the recovery of the companies in the oil

industry has been consistently growing, their share price has not broken above pre-

pandemic levels yet. (SHELL PLC saw a drop of 65% of its share price in 2020, and BP PLC

saw a drop of 66% of its share price in 2020).

3- How is the economy performing?

GDP stands for Gross Domestic Product, it is an economic indicator which measures the

market value of all the final goods and services produced within a specific period. According

to data published by the Office for National Statistics, real GDP fell by 0.1% in Quarter2 2022

and is now 0.6% above its pre-pandemic levels.


Fig 2: Real GDP (ONS Statistics)

In comparing G7 real GDP % change to its pre-pandemic levels, UK GDP in Q2 2022 rose

0.6% higher. This compares to 2.6% higher for the US, 1.7% higher for Canada, and 1.4%

higher for the Eurozone.


Fig3: G7 real GDP % Change Chart


4- The inflation rate hits a four-decade high!

The Consumer Price Index (CPI) is a measure of the average change over time in the prices

paid by consumers for a representative basket of goods and services. It is one of the most

popular measures of inflation and deflation.

According to the ONS, the annual inflation rate in the UK jumped to 10.1% on July 2022, a

double-digit annual increase for the first time since February 1982, four decades high!


Fig4: Inflation Rate in the UK Chart


While all advanced economies have seen a strong surge in inflation, the UK has the

strongest annual % change in CPI, inflation has been the strongest in Britain in comparison

with other G7 countries.


Fig5: G7 countries and the Euro area, annual % change in CPI.

Food inflation in the United Kingdom increased to 12.6% in July 2022, this is the highest it

has been since August 2008 with an all-time high of 13%. This will have a greater impact on

low-income households because they spend a greater proportion of their income on energy

and food, which are raising the fastest in price. Which in turn will create greater disparities

between the poor and the rich.

For a better understanding of the extent to which each different component has

contributed to the overall annual inflation rate, the figure below published by the ONS

demonstrates the largest contributions to the annual inflation rate were made by Housing

and household services, transport, and Food and non-alcoholic beverages.



Fig6: CPI Inflation rate driven by housing and household services, transport and food.

This suggests a cost of living crisis which would eventually have a great impact on economic

growth, many economists believe that this hit on household living standards would trigger a

recession.

5- The unemployment rate falls to a nearly five decades’ low, defying the surge in the

cost of living

The Office of National Statistics reported an unemployment rate of 3.8% in Q2 of 2022, this

is 0.1% higher than the previous quarter, and 0.2% below pre-pandemic levels. A decrease

in the unemployment rate along with accelerated wage growth represents a higher

inflationary pressure for the Bank of England.

In comparing the G7 harmonized unemployment rate in % during Q1 2022, the UK

harmonized unemployment rate was 3.7%, down from 4% in the previous quarter. This

compares to 3.8% for the USA, 7.3% for France, and 6.8% for the Eurozone (this figure fell to

6.6% in Q2 2022).


Fig7: International Comparison- Harmonised Unemployment Rate (%) Q1-2022

With a surge in the inflation rate, a decrease in the unemployment rate along with high

wage growth in the second quarter - A challenging decision awaits the Bank of England in

raising rates and how often to do so.

6- The Bank of England warns of an upcoming Recession!

The Bank of England warned of an inevitable fall into a recession, while raising rates to the

highest in 27 years. Interest rates rose to 1.75%, while inflation is expected to hit 13%.

The high inflation and slowing growth are mainly caused by a surge in energy bills, which is

driven by Russia's invasion of Ukraine. Russia's restriction of supply has pushed household

energy bills by unusual amounts.

Governor Andrew Bailey clarified that even though the cost of living in the UK rose to high

levels which is difficult for many households if it didn't raise interest rates it would be

getting worse.

" 'Well, why have you raised interest rates today, doesn't that make it worse from that

perspective in terms of consumption?', I'm afraid my answer to that is, it doesn't because

I'm afraid the alternative is even worse in terms of persistent inflation."

Governor Andrew Bailey also commented after its decision: "There is an economic cost to

the war. But it will not deflect us from setting monetary policy to bring inflation back to the

2 per cent target".

According to the Monetary Policy Report, Higher energy prices are set to push inflation to

13% over the next few months. This is mainly due to a shortage of supply caused by Russia's

invasion of Ukraine.


Figure 8: Annual inflation rate (% change) and the contribution of goods, services and energy

prices, and its forecast

The effect on household incomes caused by a rise in energy prices would lead to slower

growth in the UK, the report indicates that the Bank of England expects a fall in the size of

the UK economy over the next 12 months.


Figure9: Annual GDP growth (%), and forecast


According to the report published by the Bank of England, inflation is expected to rise to

13% and above by the end of this year, and start falling by the end of the next year 2023.

Inflation is expected to be around the 2% target in about 2 years.


Figure10: Annual Inflation Rate (change%), and its forecast

7- Economic Outlook Forecast:

Despite the successful recovery of the UK economy from the pandemic hit, Russia's invasion

of Ukraine has put great upward pressure on energy prices and the supply chain. Based on

economic data released by the ONS, and the Monetary Policy Report from the Bank of

England, these growing political tensions would bring about a recession in 2023.

In looking at the prospects of the UK economy in the 3rd Quarter of 2022 and 2023, These

Geopolitical tensions are expected to have a greater impact on the economy, the extent of

which depends on how the conflict would unfold. The uncertainty around the outlook is

exceptionally high, especially for commodity prices, and supply chain disruption. Which in

turn would have a great impact on inflation, consumer confidence, unemployment rate, and

thus economic growth.


Figure11: Forecast summary of the MPC’s baseline Projections


The Monetary Policy Committee released a baseline projections forecast, outlining how they

expect the inflation rate to fall to 9.5% by end of 2023, and to hit 2% by the 3rd Quarter of

2024. GDP is expected to fall to -2.1 by the end of 2023, thus the economy is forecast to

enter a recession by the end of this year and throughout 2023, and hit 0.0 by Q3 2024. The

unemployment rate is expected to rise to 4.4% by Q3 2023 and hit 5.5% by Q3 2024. Growth

is very weak by historical standards, outlining how the rise in commodity prices and

disruption of supplies would cause an exceptional contraction in the growth outlook of the

UK economy.


References:

- Figure 1: GFK Consumer Confidence Chart [Online Image]. Available at:

https://tradingeconomics.com/united-kingdom/consumer-confidence

- Figure 2: Real GDP data, UK, Quarter 4(Oct to Dec) 2019 to Quarter 2 (Apr to June) 2022. Source:

Office for National Statistics- GDP first quarterly estimate. Available at:

https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpfirstquarterlyestimateuk/

apriltojune2022

- Figure 3: G7 real GDP % change compared to pre-pandemic level, updated 2 nd September. Available

at: https://commonslibrary.parliament.uk/research-briefings/sn02784/

- Figure 4: Inflation Rate in the UK Chart. Trading Economics, Source: Office for National Statistics.

Available at: https://tradingeconomics.com/united-kingdom/inflation-cpi

- Figure 5: G7 countries and the Euro area, annual % change in CPI. Source: OECD, ONS, Eurostat. The

New Statesman Available at: https://www.newstatesman.com/chart-of-the-day/2022/08/uk-

inflation-rate-2022-vs-europe-g7-other-countries

- Figure 6: CPI Inflation rate driven by housing and household services, transport and food. Source:

Office for National Statistics- Consumer Price Inflation. Available at:

https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/july202

2

- Figure 7: International Comparison- Harmonised Unemployment Rate (%) Q1-2022. Source: OECD.

Available at: https://commonslibrary.parliament.uk/research-briefings/sn02800/

- Figure 8: Annual inflation rate (% change) and the contribution of goods, services and energy prices.

Monetary Policy Report available at: https://www.bankofengland.co.uk/monetary-policy-

report/2022/august-2022

- Figure 9: Annual GDP growth (%), and forecast. Monetary Policy Report Available at:

https://www.bankofengland.co.uk/monetary-policy-report/2022/august-2022

- Figure10: Annual Inflation Rate (change%), and its forecast. Monetary Policy Report available at:

https://www.bankofengland.co.uk/monetary-policy-report/2022/august-2022

- Figure11: Forecast summary of the MPC’s baseline Projections. Monetary Policy Report Available at:https://www.bankofengland.co.uk/monetary-policy-report/2022/august-2022