UK economic recovery to be slower than expected; pandemic worries weigh on euro and gas – business live

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Britain’s economy will grow slower this year and next year than previously hoped, as ongoing supply chain disruption and rising prices drag back growth.

So warns the EY Item Club this morning, as it predicts that the ‘tougher’ part of the recovery is upon us.

In its autumn forecasts, it warns that ‘higher and more sustained inflation’, recent rises in energy prices, and intensifying supply chain disruption mean the recovery won’t be as strong as hoped.

EY now sees UK GDP rising 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%, down from 6.5% forecast before.

By 2023, growth is back down to 2.3%, before sagging to a lacklustre 1.8% in 2024 and 2025.

Martin Beck, the chief economic advisor to the EY ITEM Club, says:

“With the boost from reopening the economy now largely passed, the UK was always expected to enter a tougher phase of the recovery.

Record growth is still forecast, but there are persistent headwinds as we approach the end of the year: pandemic-related policy support is being withdrawn, supply chain disruption and shortages have been more severe than expected, and the scope for catch-up growth has been run down.

With households being squeezed 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 will not keep pace with rising prices:

“Although inflation looks like it’ll peak higher – and stay higher for longer – than first anticipated, it doesn’t look like this will tip into ‘stagflation’, the combination of sluggish growth and persistent high inflation.

The inflationary landscape will probably contribute to real household incomes falling around the turn of the year, slowing the rebound in consumer spending and decelerating the strong recovery seen earlier in 2021.

But there are still reasons for optimism, with EY seeing a smaller increase in unemployment than feared, due to the success of the furlough scheme.

The jobless rate is now seen peaking at 4.6% early next year, up from 4.3% in the last quarter. Back in July, EY had forecast a post-furlough unemployment rate peak of 5.1% in the second half of this year.

Beck explains:

“Despite these challenges, the UK economy has made some significant progress in regaining pandemic-related losses and the recovery is far from out of steam. Looking at the big picture, the economy has recovered much faster than was expected at the start of this year.

Clear grounds for economic optimism remain too. While not every household has been able to save more over the last year or so, the build-up of household savings means consumers are in a good position overall. Meanwhile, the labour market is healthy and businesses have built up robust balance sheets. Long-term economic scarring from the pandemic is likely to be minimal.”

But… Europe’s pandemic risks have not lifted, as Austria awakes to its fourth national lockdown.

Austria’s 20-day nationwide partial lockdown is the toughest in western Europe for months, with Vienna also making vaccination mandatory for all from February, prompting protests over the weekend:

Travel stocks have come under pressure, falling on Friday after Austria’s lockdown was announced, as investors worry that Europe’s recovery may be hurt by fresh restrictions this winter.

Analysts at MUFG Bank say:

Market participants are becoming more fearful of downside risks to growth in Europe.

The latest COVID wave has already prompted policymakers to re-tighten restrictions. It joins the energy price shock, geopolitical tensions with Russia and the developing currency crisis in Turkey on the list of worries for European investors.

In contrast, the U.S. economy has regained upward momentum and the Fed’s communication is turning more hawkish.

The agenda

• 11am GMT: Bundesbank Monthly Report
• 1.30pm GMT: Chicago Fed national activity index for October
• 3pm GMT: Eurozone consumer confidence flash estimate for November
• 3pm GMT: US existing home sales for October