On the 31st of December 2019, the first report of Covid-19 was submitted by China to the World Health Organisation (WHO). Since then, the effects of the repeated loosening and tightening of preventative measures in the UK, including three national lockdowns, has seen unprecedented change in the UK’s economic performance. This comes on top of the disruptive influence of Brexit. There are twenty-one major economic indicators commonly used to provide an insight into the status of the economy. On the 21st of September, 2020, McKinsey published an article hinting that by the end of the second half of 2021 the world might reach an “epidemiological endpoint” to the disease. However, the emergence of the new Omicron variant of Covid has delayed prospects for this “endpoint”. Their latest article dated the 15th December 2021 declares that the future of Covid and its impact on these twenty-one indicators will be reliant on government policy to control the spread of disease and encourage public confidence back into its typical spending patterns. What might be the economic prospects for 2022 as the UK heads into another year of turmoil -specifically with reference to employment, inflation, GDP, and balance of trade?
The UK labour market is key to determining economic progress. The number of citizens who are employed and unemployed at any one time affects the satisfaction levels of individuals at a micro level, and the productive capabilities of the economy and fiscal balance at the macro level. Andrew Oswald of Warwick University has researched and published widely on the link between human happiness and productivity, concluding that when people are more satisfied they are more productive. Therefore, if the UK is to maximise economic growth for the next year, reducing unemployment will be incredibly important. In addition, there have been difficulties employing European migrant workers, especially in domestic, industrial, and agricultural sectors. Issues surrounding structural factors such as this have demonstrated the need to rebalance employment through greater geographic flexibility and retraining. Officially in 2020, the UK was in a recession, meaning two successive quarters of economic contraction, and typically in a recession, there is increasing unemployment due to business failures. The worry here is of rising and persistent unemployment due to market rigidity, meaning that those who are recently unemployed struggle to find new jobs after an economic shock. Therefore, in order to prevent this, there must be some government interjection to minimise the risk and damage of persistent unemployment.
A National Retraining scheme was launched in 2017 and has been updated every year since. Recent news has focused on the importance of keeping the UK’s hospitality sector, which has been most at risk of collapsing, afloat throughout this winter, ensuring people remain employed in their work. As a result, in December the government made the decision not to reintroduce restrictions on the service industry (nightclubs, restaurants, bars etc..). Q3 2021 figures from the Office of National Statistics show that there is currently a 75.5% adult employment rate, up 149,000 from the previous quarter, whereas there is a 4.2% unemployment rate, down 127,000 from the previous quarter’s figure of unemployment. Additionally, in comparison with the international unemployment figures for the third quarter of 2021 (Eurozone – 7.5%, USA – 5.1%, G7 – 5.0%), this data is an optimistic sign for a faster recovery of the economy than expected.
The Consumer Price Index (CPI) measures the increase in the general price of goods and services and is the primary index of inflation in the UK. Some inflation is key because it encourages consumers and firms to spend now as the real value of their cash will erode over time. Moreover, inflation reduces the value of the national debt which the government needs to repay. However, as prices increase, the purchasing power of the currency in use decreases and the population, especially those on fixed incomes, suffers a reduction in their standard of living. As a result, governments need to limit inflation. The most recently reported figure for inflation in the UK has shown that in December 2021 the annual CPI inflation rate was 5.4%, an increase from November of 0.3%. This is very high in comparison to the 2% target inflationary rate set by the government for the Bank of England to meet. As a result of this worryingly high rate of inflation, the Bank of England increased the national bank rate from 0.1% to 0.25% in December as a measure to control inflation from spiralling out of control.
However, this recent increase in prices has a number of reasons behind it which might suggest that there is little cause for concern. Over the course of 2021, the UK economy reopened back to full capacity and entered stage 4 of the proposed “roadmap” out of lockdown with almost all restrictions lifted on the 19th of July. Without the threat of Omicron or the typical high pressure on the NHS during winter, demand rapidly rose as people were spending more. As a result, companies struggled to keep up with the rapidly increasing demand since many supply chains were badly damaged in the months of repeated lockdowns as well as by the Ever Given Suez canal incident. For example, a shortage of computer chips has led to fewer new cars being made and a subsequent rise in second-hand prices.
The House of Commons library figures for the Q4 2021 claim that the biggest rise in prices was in transport due to increased fuel costs, insufficient tanker drivers and a shortage of containers in key ports. This serves as a perfect example whereby consumers have made a return to travelling and the supply of fuel has not been able to keep up. One concern that has been raised over the issue of supply chain costs, linked to the price of fuel, is stagflation (Economic Stagnation + Inflation). This occurs when there is high inflation but there is also high unemployment and economic growth slows. Last seen in the 1970s, stagflation is a very threatening concern that many are worried about as the UK heads into 2022. However, there is some evidence to indicate that compared to the 70s, the economy is actually facing deficient supply compared to deficient demand which would mean that if supply chains are able to recover there would be less of a risk of stagflation since inflation would also subsequently reduce whilst economic activity would increase. The general anticipation for 2022 is that rises in the price level should hopefully drop down to more reasonable levels as the post-pandemic supply chain mess gradually clears.
GDP is the total market value of all finished goods and services produced in a country. It is the main measure of economic activity in the UK. Specifically, it is important for consumer confidence, business confidence and government decision makings surrounding the economy. In the most recent quarter of 2021, GDP grew by 1.1% compared to the previous quarter. In comparison to 2020, Q2 suffered a 19.4% drop followed by a 17.6% increase in Q3. This was due to the initial lockdown followed by the re-opening of the economy. Since then, the UK has seen steadier growth which is an encouraging sign for our economy, where GDP is now just 0.5% below it pre-pandemic level in February 2020. One of the most important ways of achieving steady economic growth is the optimal condition for increasing business and consumer confidence. If companies and individuals are more reassured that the future is likely to be economically secure, then they are more likely to spend and invest which is important for further sustained growth. Furthermore, stable growth is important to a steady-state economy that seeks to balance economic growth with environmental integrity – finding an equilibrium between population and production growth.
Therefore this is a hopeful sign for the UK economy as it begins to finally head out of the volatile conditions caused by the disruptions of 2020. By 2022, the forecasted growth rate has decreased from 6.1% to 5.1% due to rising costs and shortages according to the Confederation of British Industry (CBI). However, these problems arise from global supply chain issues and the increasing cost of fuel and energy. The CBI does expect these short term problems to “largely dissipate by the middle of the next year” with the hope that economic growth will continue to be driven by household spending as incomes grow and savings from the pandemic are spent. S&P Global revealed that by the end of the third quarter this year, households have accumulated savings worth 10% of 2019 GDP which is promising for consumer spending in 2022. Thus growth is likely to be led by domestic rather than export demand.
The Balance of Trade, which measures the difference in the value of a country’s imports and exports, is a crucial component of an economy’s Balance of Payments. A trade surplus is generally desirable since it creates employment and economic growth. This happens because when an economy is exporting more value than importing, there is typically high domestic productivity associated with the manufacturing of goods and services; this creates job opportunities. There tends to also be an influx of demand for products that require additional labour to produce, which can boost employment and growth. It also strengthens the currency in comparison to other countries’ currencies, which lowers the cost of imported goods, thus providing cheaper goods for consumers.
The UK has been in a trade deficit since 1998, meaning that it imports more goods than it exports. Q4 2019 saw the first positive current account balance since 1998, with a £2.8 billion surplus. However, as of Q3 2021, the total current account balance is minus £2.4 billion meaning the UK economy is in a current account deficit. This may seem to be a sign of a lack of competitiveness in the economy since the value of exports exceeds the value of imports. Nonetheless, the nature of the current account is extremely volatile and this is not generally regarded as either good or bad. Since 2011 the UK current account has narrowed towards an equilibrium of import and export value, nearly reaching equilibrium in 2019 – the same time as Article 50 for Brexit was invoked. Brexit has raised uncertainty due to barriers around UK trade and lower euro-area demand which has long been a stable component of international trade.
The Bank of England claimed in November of 2019 that Brexit could potentially lead to the sterling falling to the same value as the dollar, 6.5% inflation and a 30% fall in house prices. This has yet to materialise, though the uncertainty surrounding Brexit may yet feed through to impact the current account balance. Whilst Covid-19 has significantly changed the supply and demand for international products and services, it may not be an all gloomy outlook for 2022. The value of sterling has been increasing steadily against the euro throughout 2021, increasing from 1.16 in January to 1.19 in December.
In all, the balance of trade in the UK has been disturbed by both Brexit and Covid; however, there seems to not have been a great impact on the typical trade deficit which the UK has got used to in the 21st century. The government is currently concentrating on rolling over existing free trade agreements with other nations or negotiating new ones, most recently with Australia in December 2021. As well as the deal with the European Commission, more than 70 have been concluded which should facilitate future international trade in both directions.
In general, there is a sense of cautious optimism for the UK economy as 2022 commences. The UK has been among the forerunners of the fastest recovering nations in the world despite also suffering some of the most. However, there is the likelihood that due to the long-lasting effects of Brexit and political uncertainty economic recovery may be susceptible to delays or setbacks.
“Let’s hope for a post-pandemic boom — finally. It’s the phenomenon most likely to see 2022 end on an optimistic note”Diane Coyle, professor of public policy at Cambridge University