How is the UK economy doing?

Toward the end of 2021, the UK economy surpassed its pre-COVID size for the first time since the Pandemic began. The Organization of Economic Co-Operation and Development (OECD) predicts that GDP will continue to rebound, projecting 4.7% growth for the UK economy in 2022.

This is slower than the estimated 6.9% growth in 2021 but still shows strong momentum. However, the Omicron variant and other factors have cast a shadow on the rosy economic outlook, especially for certain sectors. There are five highly inter-related factors driving (and complicating) the current state of the British economy.

Omicron put a damper on the better-than expected growth in the UK economy in 2021, although it is not anticipated to have a significant impact on long-term growth. However, Pandemic-related uncertainty does continue to hinder the fresh flow of fresh business investment. Likewise, plant closures in other parts of the world due to the virus are having knock-down effects on UK consumer and commodities markets.

For investors, the longer-term paradigm shifts brought about by COVID can be an opportunity. Most of these changes have been driven by digital transformation, which has affected areas like cybersecurity, healthcare, e-commerce, online education, and many other industries.

The prices of everything from fuel to food are rising as a result of supply chain issues, labour shortages, higher energy and commodity prices, as well as a swift rebound from COVID, with consumers unleashing pent-up demand. The OECD project that inflation will hit a high point of 5% by the middle of this year before subsiding. Meanwhile, the Bank of England estimates a peak of 6%.

For investors, this environment makes an interest rate hike virtually inevitable, a move that could throw cold water on the economy and hurt the value of UK investments.

Like the other four factors explored in this article, supply chain woes are multifaceted and closely tied to other political and macro-economic determinants.

For example, COVID-related restrictions in manufacturing countries, especially in Asia, are reducing output and limiting goods. Meanwhile, demand for consumer goods like cars, home exercise equipment, food, furniture, and toys is skyrocketing. The Pandemic has caused a shift from spending on services and experiences, like travel or dining out, to products, like entertainment systems. Supply chain issues have also been exacerbated by the difficulty of procuring raw goods.

Studies have shown that while large businesses have the technology and resources to adapt to and even profit from these shortages, small businesses are the most likely to suffer. Shipping and freighting have emerged as major winners in this scenario and can command very high prices as demand surges and supply remains limited.

The UK economy today is seeing record-high job vacancies, and the primary culprit for the ensuing labour shortages is Brexit. The sectors most impacted are hospitality and entertainment, which are also the industries hardest hit by COVID.

The fact that Brexit occurred immediately prior to and during the Pandemic was particularly deleterious for the labour market: the virus made EU workers return home more quickly than expected, allowing little time to retrain new staff to take their places.

This political translation continues to affect imports and exports due to higher duties. As mentioned above, it is also a major reason for the lack of workers in everything from trucking to seasonal agriculture, which in turn is driving supply shortages, which is causing inflation.

The current state of the UK economy is clearly influenced by a complex set of enmeshed factors that are very much a product of this juncture in history. The result is a quite novel scenario that can be a boon to savvy investors who pay attention to the bigger picture or the downfall of the inattentive.