Economic Outlook - July 2022

At the time of writing, the UK economy looks likely to be the worst affected by the current global economic crisis compared to the rest of Europe.

The major issues facing the UK economy are similar, with the shocks from the Russian invasion of Ukraine challenging global growth and driving inflation across the board. Inflation is certainly the biggest issue in the UK, with the latest data from the Office for National Statistics, (ONS), showing the Consumer Price Index (CPI) rose by 9.1% in the 12 months to May 2022, up from 9% in April.

In the Bank of England’s financial stability report, released in July 2022, inflation is forecast to rise to 11% by October. The Bank of England also warns that the UK will enter a recession (two successive quarters of negative growth) later this year.

Recent outlooks from the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) also suggest that the UK economy is the most exposed to recession. Inflation is rising higher and persisting for longer than in our European counterparts, all of which are struggling with energy and commodity price shocks.

So why are the same underlying drivers more negatively impacting the UK economy? Prices of food and energy have risen particularly sharply globally, largely driven by Russia’s invasion of Ukraine and the subsequent disruption in energy and commodity markets. This has been exacerbated here in the UK in part due to the existence, and subsequent raising, of the energy price caps for domestic consumers. This meant inflation was supressed in early 2022 in the UK but is now rising faster. In addition, the strength of sterling has weakened on foreign exchange markets in response to the Bank of England’s predictions on inflation and growth. This has further increased the cost of imported goods, driving the cost of imported food, fuel and fertilisers.

Many economists predicted that Brexit would make the trade-off between inflation and growth more difficult, both because of trade barriers and labour shortages. A smaller pool of labour has made the labour market less flexible available, driving wage price inflation in shortage occupations.

Price inflation in general also feeds into wage demands with workers looking to mitigate the effects of inflation eroding their real incomes by demanding pay rises to compensate. This can further fuel inflation through a wage/cost spiral as firms costs are pushed up and those cost increases are passed on to consumers.

With higher prices and weaker growth, firms and households will find conditions increasingly challenging throughout 2022. Wage increases are unlikely to keep pace with rising inflation. In May, the Bank of England, (BoE), projected aggregate UK real disposable household income would experience its second largest annual contraction since records began in 1964, largely reflecting increases in the costs of energy and, to a lesser degree, food. This is likely to affect lower-income households disproportionately, for whom essential spending represents a greater share of their income.

The latest OECD outlook shows inequality in the UK is higher than in most advanced economies, with the poorest 20% of households earning 6.7% of total income. The implications of this are obvious. Price inflation for essential goods such as food and fuel will mean many will be forced to reduce consumption. The impact of food price inflation on consumer behaviour is discussed within the individual sector outlooks.

Retailers are working hard to keep the costs of food down for consumers, which has consequences for producers who are also affected by the fuel and input cost rises, squeezing business margins in many sectors. Our sector outlooks examine how we think this will affect food production.