Stark warning over hit to GDP growth from new variant

Economic growth could more than halve next year if new restrictions are imposed to deal with the Omicron variant, a report has today warned.

The uncertainties around the impact of the new variant have led to a wide range of forecasts for GDP growth during 2022.
The uncertainties around the impact of the new variant have led to a wide range of forecasts for GDP growth during 2022.

However, the uncertainties caused by the latest developments will see the Bank of England hold off raising interest rates this month, KPMG also predicted in its latest UK Economic Outlook.

The report said the potential disruption to the Christmas trading season from the new variant could be a huge blow to recovery hopes for hospitality and travel businesses, but the impact will depend on the extent to which new social distancing restrictions are introduced.

It predicts GDP growth could hit 4.2 per cent year, but also said that figure could fall to just 1.8 per cent if tough measures are needed to control the variant.

Yael Selfin, chief economist at KPMG UK, said the Omicron variant has “elevated the level of uncertainty” about the recovery path from the pandemic.

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“While the impact is not expected to be as severe as at the start of the pandemic, or even the beginning of this year, increased uncertainty and the potential reintroduction of social distancing measures could see output fall this month and during the first quarter of 2022,” she said.

Assuming that no further restrictions are introduced as part of measures to tackle the spread of the Omicron variant, the report said unemployment “might rise only gently”.

It said the labour market “appears to have withstood the end of the furlough scheme” with the unemployment rate expected to peak at 4.5 per cent in its more optimistic scenario for 2022. However, it warned that new restrictions to combat the Omicron variant could see unemployment peak at 5-5.7 per cent during the year.

The report said inflation will depend in part on the potential economic fallout of the new variant.

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“ A deteriorating pandemic outlook could once again increase the demand for goods and put more pressure on supply chains in the short-term but at the same time, cooling demand for energy and some services could ease inflationary pressures,” it pointed out.

Inflation is expected to average between 4.3 and 4.8 per cent in 2022 and 2.3 and 2.5 per cent in 2023.

The report said the high level of uncertainty about the new variant is expected to see the Bank of England hold off raising interest rates in December 2021. However, rates are expected to rise to 1-1.25 per cent by the end of 2023 in order to prevent a ratcheting up of wage growth as the recovery gathers renewed momentum.

Jon Holt, chief executive of KPMG UK, said: “Long term economic growth remains reliant on the UK’s ability to increase productivity, decrease uncertainty and give businesses the confidence they need to invest. We need to create the conditions to accelerate companies’ investment in technology and power the UK’s recovery.

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“While companies have been grappling with global supply chain problems for some months, we expect these to ease gradually as increased capacity comes on board. Nevertheless, growth momentum could stall if businesses find it harder to recruit more staff and a more sustained pick-up in UK GDP growth would require productivity to rise.”

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