Markets Weekly podcast
23 May 2022
In this week’s special podcast on the UK economy, Henk Potts, our Market Strategist, discusses the country’s current inflation profile, increasing tax burden, and growth prospects for 2022 and 2023. He also explores the implications of the cost of living crisis and shifting trends within the labour market.
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Hello. It’s Monday, 23rd May and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets.
My name is Henk Potts, Market Strategist for Barclays Private Bank, and this week I’ll take a step back from the markets to focus on the UK economy. I’ll concentrate on Britain’s inflation profile, what we can expect from the Bank of England in the coming months, the increasing tax burden, and how the cost of living crisis is already starting to impact consumer behaviour.
So, after enjoying one of the strongest recovery rates in the developed world in 2021, with growth of more than 7%, the UK economy looks set to stall over the course of the are all expected to take their toll on growth next 18 months. Surging inflation, higher interest rates, tight labour markets, and the rising tax burden prospects.
To remind you, UK inflation jumped to 7% in March. Petrol prices have been rising substantially, in fact registering their largest monthly increase on record. Reopening trade continues to play out and that’s been pushing up prices, particularly in hospitality.
If we look at the inflation outlook, well, given the increase in Ofgem price caps, we look for inflation to reach double digits by the time that we get to October, the Bank of England suggesting UK inflation will hit 10%. We think it could probably ease back after that, but we still see inflation above that 2% target level through the course of 2025, our forecast horizon, and that, of course, keeps the pressure up on the Bank of England to try and normalise policy further.
The Bank of England offered a gloomy assessment of the economic conditions, after forecasting inflation would continue to rise and warned the UK economy faces a prolonged period of stagflation. Despite the faltering growth profile, the MPC still felt compelled to hike rates by a further 25 basis points to 1%, at the main meeting, which is the highest level since 2009.
Given that the central bank is now far more concerned about the level and the persistence of inflation, the second-round effects on wages, and rising inflation expectations, we expect further policy increases in the coming months, forecasting 25 basis point hikes at both the June and the August meeting. That will put the bank rate at 1.5% by the time that we get to the summer.
The tax burden in the UK looks set to rise to its highest level in decades over the course of the next couple of years. The government has either enacted or announced hikes to corporation tax. They’ve increased the national insurance contributions. They’ve also said that income tax thresholds would be frozen. If you look at the corporation tax, for example, it’s scheduled to rise from 19% to 25% in April 2023. National insurance contributions, as we know, have already risen by 1.25 percentage points.
So if you look at the overall tax burden, it’s forecast to continue to rise. It goes from 33% of GDP in 2019/2020 to 36% in 2026/2027. To put that in some sort of context for you, that will be the highest level that we’ve seen since the 1940s.
In terms of the UK labour market, well, unemployment rates in the quarter to February fell to 3.8%. That’s equalling the 2019 low. The number of job vacancies rose to a new record high of just under 1.3 million in March. Growth in average total pay surged in the quarter to February, to 5.4% from 4.8% in January.
So, you start to see the impact of those changes in labour markets playing out in terms of companies’ growth prospects, as they struggle to find new workers, but also stoking inflation as those wages continue to rise.
What we do know is the cost of living crisis will continue to play out over the course of the next couple of years. The Office for Budget Responsibility are now forecasting the fall in real income will be 2.2% over the course of the next year. This decline in living standards would represent the largest in any financial year since records began in 1956.
We’re already starting to see that impacting consumer behaviour. So if you look at retail sales, for example, they contracted in March. If you look at footfall in retail and leisure facilities, they’ve been easing back. We know that consumer confidence has already fallen to multi-year lows.
In terms of the outlook, with the recovery phase continuing to play out at the start of this year, UK growth for, calendar year 2022, is still expected to come in at a very respectable 3.8%. However, that headline figure, I think, masks the deterioration that is forecast for the second half of the year and into 2023.
The accumulation of this substantial headwind suggests that growth will certainly slump as we go through the course of next year, and potentially there’s a risk, as the Bank of England have been forecasting, that we could be talking about a small contraction during the course of 2023.
So that’s our current view on the outlook for the UK economy. We’d like to thank you once again for joining us. We will, of course, be back next week with our latest instalment.
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