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Britain’s economy will grow more slowly this year and next year than previously expected as continued supply chain disruption and rising prices drag back growth.
So warns the EY Item Club this morning as it predicts that the “harder” part of the recovery is with us.
In its fall forecast, it warns that “higher and more sustained inflation,” a recent rise in energy prices and a tightening disruption of the supply chain mean the recovery will not be as strong as expected.
EY now sees British GDP rise by 6.9% this year, down 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 lower – at 5.6%, less than 6.5% forecast.
By 2023, growth is back down to 2.3%, before declining to a bleak 1.8% in 2024 and 2025.
Martin Beck, the chief economic adviser of the EY ITEM Club, says:
“With the acceleration of reopening of the economy now largely over, Britain has always expected to enter a more difficult phase of the recovery.
Record growth is still forecast, but there are steady headwinds as we approach the end of the year: political support related to a pandemic is withdrawn, disruption and lack of supply chain have been more severe than expected, and the scope for growth growth is more severe. was sunk.
With households pressured by inflation, EY has now cut its forecast for consumer spending this year from 4.8% to 3.9% growth, and for next year to 6.8% from 7.4%
Beck warns that household incomes do not keep pace with rising prices:
“Although inflation appears to be peaking higher – and will remain higher for longer – than previously anticipated, it does not look like this will reverse to‘ stagflation ’, the combination of sluggish growth and persistently high inflation.
The inflationary landscape is likely to contribute to real household incomes declining around the turn of the year, slowing the rebound in consumer spending and slowing the strong recovery seen earlier in 2021.
But there are still reasons for optimism, where EY sees a smaller increase in unemployment than feared, due to the success of the leave scheme.
The unemployment rate is now seen peaking at 4.6% at the start of next year, up from 4.3% in the last quarter. Back in July, EY forecast a post-retirement unemployment rate of 5.1% in the second half of this year.
“Despite these challenges, the British economy has made some significant progress in recovering from pandemic-related losses and the recovery is far from steamy. Looking at the big picture, the economy has recovered much faster than expected earlier this year.
Clear grounds for economic optimism remain as well. Although not every household has been able to save more over the last year or so, the accumulation of household savings means consumers are in a good position overall. Meanwhile, the labor market is healthy and businesses have built robust balance sheets. The long-term economic scar of the pandemic is likely to be minimal. “
But … Europe’s pandemic risks have not risen as Austria wakes up to its fourth national blockade.
Austria’s 20-day nationwide partial confinement is the hardest in Western Europe in months, and Vienna has also been making vaccination mandatory for everyone since February, prompting protests over the weekend:
Travel stocks rebounded, falling on Friday after Austria’s closure was announced, as investors fear Europe’s recovery may be hurt by recent restrictions this winter.
Analysts at MUFG Bank money:
Market participants are more afraid of downside risks to growth in Europe.
The latest COVID wave has already prompted policymakers to tighten restrictions. It joins the energy price shock, geopolitical tensions with Russia and the developing currency crisis in Turkey on the list of concerns for European investors.
In contrast, the U.S. economy has regained upward momentum and the Fed’s communication is becoming more murky.
- 11am GMT: Monthly Report from Bundesbank
- 13:30 GMT: Chicago Fed national activity index for October
- 3pm GMT: Eurozone confidence confidence estimate for November
- 3pm GMT: US existing home sales for October