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The UK economy will grow more slowly than previously hoped this year and next as ongoing supply chain disruptions and rising prices hold back growth.
This is warning the EY Item Club this morning as it predicts the “harder” part of the recovery is ahead of us.
In her autumn forecast, she warns that “higher and more sustainable inflation”, the recent hike in energy prices and increasing disruption in the supply chain mean the recovery will not be as strong as hoped.
EY now sees UK GDP growing 6.9% this year, up from 7.6% forecast in the summer [but still the best year since 1941, after last year’s near-10% plunge]
But growth in 2022 is also seen to be lower – at 5.6%, after 6.5% previously forecast.
Growth will drop back to 2.3% by 2023, before dropping to a lackluster 1.8% in 2024 and 2025.
Martin Beck, the senior economic advisor to EY ITEM Club, says:
“With the boost from the reopening economy now largely over, it was always expected that the UK would enter a tougher period of recovery.
Record growth is still projected, but headwinds remain towards the end of the year: pandemic political support is being withdrawn, supply chain disruptions and bottlenecks have been more severe than expected, and scope for catch-up growth has been reduced.
With households under pressure from inflation, EY has cut its consumer spending forecast from 4.8% to 3.9% this year and from 7.4% to 6.8% next year.
Beck warns that household incomes will not keep pace with rising prices:
“While inflation looks like it is peaking – and staying longer – than initially expected, it doesn’t look like it is tipping into ‘stagflation’, the combination of sluggish growth and persistently high inflation.
The inflationary landscape is likely to cause real household incomes to decline around the turn of the year, slow the recovery in consumer spending, and slow the sharp recovery at the beginning of 2021.
But there are still reasons to be optimisticwith EY seeing a smaller rise in unemployment than feared due to the success of the vacation program.
The unemployment rate will now peak at 4.6% early next year, compared to 4.3% in the last quarter. In July, EY had already forecast a high unemployment rate after vacation of 5.1% for the second half of the year.
“Despite these challenges, the UK economy has made some significant strides in recovering from pandemic losses and the recovery is far from fizzling. Overall, the economy has recovered much faster than expected at the beginning of the year.
Economic optimism also remains clear. While not every household has been able to save more in recent years, building personal savings means that consumers are generally well positioned. The job market is now healthy and companies have built robust balance sheets. The long-term economic scars from the pandemic are likely to be minimal. “
But … Europe’s pandemic risks haven’t diminished as Austria wakes up to its fourth national lockdown.
Austria’s 20-day nationwide partial ban is the toughest in Western Europe in months, with Vienna also requiring vaccination for everyone from February, which led to protests at the weekend:
Travel stocks have come under pressure, falling on Friday following the Austria lockdown announcement as investors fear that new restrictions this winter could hurt Europe’s recovery.
Analysts at MUFG Bank to say:
Market participants are increasingly afraid of downside risks to growth in Europe.
The latest wave of COVID has already prompted politicians to tighten restrictions again. The energy price shock, geopolitical tensions with Russia and the looming currency crisis in Turkey are on the list of worries for European investors.
In contrast, the US economy has regained its upward momentum and the Fed’s communications are becoming more restrictive.
- 11:00 GMT: Monthly report from the Bundesbank
- 1:30 p.m. GMT, Chicago Fed National Activity Index for October
- 15:00 GMT: Eurozone consumer confidence flash estimate for November
- 15:00 GMT: Existing US homes sale for October