Rishi Sunak facing statement nightmare as Putin’s war threatens UK recovery | City & Business | Finance
GDP figures released for the UK on Friday showed Britain’s path out of the pandemic has so far been successful with a 0.8 percent rise in January, reversing the previous Omicron induced loses in December. The increase has taken GDP back above pre-pandemic levels, driven particularly by a recovery in the service sector. Despite the bounceback though, the widespread economic threats from Russia’s invasion of Ukraine could cut off the UK’s green shoots. Paul Dales, Chief UK Economist at consultancy Capital Economics, warned the figures were: “as good as it gets for this year.”
George Lagarias, Chief Economist at Mazars, warned the rise “might be temporary”, adding: “spiking energy and raw materials prices in February and March may significantly alter the growth calculus”
Rising energy costs have been a problem since economies began emerging from the pandemic, however Russia’s invasion has pushed them to new heights with oil quickly smashing past the $100 per barrel threshold and reaching peaks over $130 (£99.43).
Natural gas meanwhile, for which Russia supplies 40 percent of European demand, has also reached unprecedented heights of as much as 800p per therm.
Gas and oil are not the only exports affected though, with both Ukraine and Russia serving as major wheat exporters and Russia providing a vital source of key manufacturing metals such as palladium and nickel.
This week trading of nickel on the London Metal Exchange had to be suspended to maintain an “orderly market” after prices more than doubled.
The prospect of a sustained period of high costs has caused alarm among a number of the UK’s biggest business groups over the threat this poses to economic recovery.
Alpesh Paleja, Confederation of British Industry Lead Economist, commented: “Conflict in Ukraine is putting considerable pressure on energy and commodity prices, which, if sustained, will push inflation even higher than expected.
“The need to press ahead with deploying new power generation through renewables, nuclear and increasing storage capacity, remains acute.”
Suren Thiru, Head of Economics at the British Chambers of Commerce, said: “Russia’s invasion of Ukraine has increased the risk of a recession in the UK by exacerbating the already acute inflationary squeeze on consumers and businesses and derailing the supply of critical commodities to many sectors of the economy.”
The situation poses big questions around two important economic events this month; the Bank of England’s next decision on interest rates and Chancellor Rishi Sunak’s spring statement.
Having already carried out two hikes in interest rates the Bank of England had previously been expected to carry out a third hike in March in a bid to prevent soaring inflation becoming embedded in the economy.
The risk of choking off the UK’s fragile growth though has lead to this being questioned since the Ukraine conflict began.
Meanwhile, pressure is likely to grow on the Chancellor both to offer support to struggling households and review planned tax rises for April.
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Mr Thiru said: “Raising interest rates and taxes at this time would weaken the UK’s growth prospects further, by undermining confidence and diminishing households’ and firms’ finances.
“We urge the Chancellor to use the upcoming Spring Statement to tackle the cost-of-doing-business crisis by delaying the National Insurance rise and committing to no further policy measures that will increase costs for business for the remainder of this Parliament.”
April’s rise in National Insurance also comes alongside a significant rise in Ofgem’s energy price cap which, combined with wider inflation, is set to put a major squeeze on household finances.
In a research note Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, said this would “lead to a sharp quarter-on-quarter reduction in households’ real disposable income of nearly 2 percent.”
He added that “this surely will arrest the recovery in spending” with a more sluggish economy meaning the Bank of England could hold off raising interest rates beyond one percent.
