22 June 2022
The cost-of-living crisis and supply chain disruption mean GDP growth is set to slow sharply, despite the 0.1% m/m rise in February that suggests first-quarter growth is set to come in at around 1% q/q.
Our forecasts suggest GDP growth will average just 0.1% in each of the remaining three quarters of this year. So while we aren’t currently forecasting a recession, it would only take a small rise in oil prices or a disruption in supply chains to push the UK into one.
The policy takeaway: Brace for another rate hike next month
High inflation and weak demand means there are no easy answers for the Monetary Policy Committee. Admittedly, the MPC will be more concerned about the labour market (data due on Tuesday) and surging inflation (data due on Wednesday), but the small rise in February’s GDP will make it more confident at the margin that the economy can withstand another rate hike in May.
February may be the last month with a positive sign in front of its economic growth figure for a while. Surging fuel prices, slumping business and consumer confidence and supply chain disruptions will start to be felt from March. They’ll really kick into gear in April, when consumer energy prices rose by 54%. We expect growth of around -0.3% q/q in the second quarter.
As well as weakening demand, middle market firms will have to contend with another supply chain crisis as a result of Russian trade sanctions and coronavirus-related shutdowns in China. Indeed, it seems we started to feel the impact of supply chain disruptions in February.
Manufacturing output fell by 0.4% m/m. This was due to contractions of 5.4% in the manufacture of transport equipment (driven entirely by the fall in vehicle production) and 4.3% in the manufacture of computer, electronic and optical products. It’s likely that output in these sectors was hampered by a continued lack of microchips. And while storm Eunice was probably responsible for the 0.1% m/m drop in construction output, sourcing construction products continued to be a challenge.
As such, 2022 will be a struggle for many middle market businesses as they battle rising input costs, supply chain disruptions and weaker demand.
Behind the data
The economy continued to bounce back from the disruption caused by omicron in February. Monthly GDP is now 1.5% above its pre-coronavirus level. Consumers got back to socialising in person in February, which explains the growth in accommodation and food service activities (up 8.6% m/m), and arts and recreation, which grew by 8.5% m/m. Overall, output in consumer-facing services grew by 0.7% in February. This was partly offset by 3.8% m/m fall in healthcare output as NHS testing and vaccination levels dropped.
Elsewhere, the 0.4% m/m fall in manufacturing output resulted in 0.6% m/m fall in industrial production. That left the sector 1.9% below its February 2020 level. In construction, output fell by 0.1% m/m.