The UK economic recovery has hit a snag as Russia’s invasion of Ukraine, rising inflation and global supply chain pressures create an uncertain outlook.
Chancellor Rishi Sunak’s (pictured) measures to help households cope with the cost-of-living crisis were overshadowed by a grim prognosis from the Office for Budget Responsibility (OBR), which has forecast much weaker GDP growth of 3.8% for 2022, down from its previous estimate of 6%.
Growth for 2023 has also been slashed to 1.8% from 2.1% previously, though in 2024 it is expected to pick up again to 2.1%.
Sunak said sanctions imposed on Russia and its allies in response to the attack on Ukraine “are working” with the rouble plummeting to record lows and trading on the Moscow Exchange still largely suspended.
But he added these actions taken to sanction Putin’s regime are “not cost-free” and had created an uncertain outlook for the UK economy in the short term.
Rising inflation expectations
The OBR now expects inflation will average 7.4% this year before falling to 4% in 2023 and 1.5% in 2024, reflecting disruptions to global supply chains and energy markets. The consumer price index already hit 6.2% in February and those figures do not reflect the full impact of the Ukraine crisis.
However, the unemployment rate is expected to drop from 4.5% in 2021 to 4% this year, before edging up to 4.2% in 2023.
To support British householders dealing with skyrocketing energy costs, Sunak unveiled several cost-cutting initiatives, including raising the national insurance threshold by £3,000.
OBR projections point to stagflation
However, Richard Carter, head of fixed interest research at Quilter Cheviot, said against the OBR’s bleak projections, these measures may not be good enough.
“While the unemployment rate is expected to be unaffected by the slowing of economic growth, it does feel as if we are entering a stagflationary period,” Carter said.
“It will be difficult for the economy to emerge from this without some additional stimulus, but with interest rates on the rise it is a tricky balancing act for the government and the Bank of England.”
