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
Comments