GDP growth ‘does not reflect reality’ – Cost of living crisis worse than Omicron | City & Business | Finance

Despite fears of an Omicron-shaped growth slowdown, the UK economy proved resilient in the final months of 2021, with GDP remaining at 1%, according to data from the Office for National Statistics. . Overall, the headline figures appeared encouraging with an annual rise of 7.5%, following the 9.4% decline due to lockdown in 2020. ground in Britain for consumers and businesses. Suren Thiru, head of economics at the British Chambers of Commerce (BCC), said: “While 2021 was a record year for the UK economy, this is more reflective of the data distortions caused by comparing it to the collapse history of activity in 2020 than the reality on the ground.The UK economy faces a significantly weaker 2022 as the crippling burden of rising inflation, soaring energy bills and from higher consumer and business taxes is dampening activity, despite a temporary boost from the lifting of Plan B restrictions.”

Brian Reading, an economist who was previously an economic adviser to Edward Heath, told the BCC was right to take this view, warning that the kind of cost inflation the UK currently experiencing generally leads to “higher unemployment”. and a recession by compressing profits (and) consumer spending.”

According to Mr Reading, a missing part of the analysis was the size and distribution of income in the UK.

He explained that the data indicated a 12.6% revenue loss in the last quarter of 2021 compared to the same period in 2019 before the pandemic.

While the loss of earnings has been driven by the pandemic, workers in 2022 are increasingly seeing their earnings eroded by inflation.

Mr Reading commented: “Inflation losses from supply chain and energy prices are inflationary transfer losses.

“The consumer pays more to buy less, the producer sells less but earns more.”

While the headline GDP figure for the year showed growth, much attention focused on the most recent data which showed a -0.2% decline in growth in December.

Rain Newton-Smith, chief economist at the Confederation of British Industry, said: “The UK economy had a lackluster end to the year, hit by the emergence of the Omicron variant and Plan B restrictions.

“While the worst of the impact appears to be over, businesses are still grappling with supply shortages and cost pressures, while households face a looming cost of living crisis.”

Although many businesses are putting Covid behind them, a new threat of soaring inflation and in particular rising energy costs and payrolls is putting major pressure on businesses.

Data from Britain’s Chambers of Commerce yesterday showed that three in four businesses were passing on rising costs to consumers, a sign that inflation was taking deeper root in the economy.

Thomas Pugh, an economist at consultancy RSM, suggested the cost of living crisis could have a bigger impact on growth than Omicron.

He explained: “Inflation and tax hikes mean that real household incomes will fall by the highest amount in three decades in 2022, which will put a significant drag on their confidence and their ability to go out and spend. .”

Inflation should now peak at around 7.25% in the spring.

April will also see an increase in the price cap for energy and National Insurance, which will reduce consumer purchasing power and put further pressure on businesses that are already struggling to balance their books.

The impact of inflation on growth was seen yesterday in the euro zone with the downward revision of the European Commission’s forecast for 2022.

Inflation has been a major problem across Europe, with Germany seeing prices rise at their fastest rate in nearly three decades.

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Meanwhile, Germany has seen GDP growth of just 2.7% for 2021, with disruption to supply chains wreaking havoc on manufacturing output.

In the US, growth has been slightly stronger with GDP growing at 5.7% in 2021, but inflation remains a major issue here, revealed yesterday to have hit 7.5% in January.

The focus is now on central banks as to the direction monetary policy will take next.

The Bank of England last week made the second of two consecutive interest rate hikes, the first since 2004.

Markets are largely expecting further rises with forecasts that interest rates could hit 2% next year, although there are suggestions that weak growth could force the Bank to reconsider this.

The US central bank, the Federal Reserve, has yet to raise interest rates, but is widely expected to make several hikes this year.

The European Central Bank, meanwhile, has avoided any hikes so far, but its stance has been increasingly challenged by member states, especially Germany.

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