Shock to shock: from COVID-19 to the cost of living; A new report released by Barclays on the key economics

Last week, Barclays released a new report entitled “Shock to shock; from covid-19 to the cost of living” which raised a number of interesting points for consideration. Some of the points are well-documented; others provoke new thoughts. It does provide a good picture of what has been taking place:

• The post-COVID recovery continued into early 2022, little impacted by the Omicron wave, but has collided with a new shock: the rising cost of living.
• The conflict in Ukraine has meant that energy and food prices are likely to keep inflation at historically elevated levels for much of 2022, eroding household purchasing power.
• The extent of the slowdown in GDP will depend on whether households tap into accumulated savings, and the strength of nominal wage growth.
• After two major lockdowns in March 2020 and January 2021, the UK economy fully reopened in stages over spring/summer 2021.
• The economy initially grew quickly in Q2 21, but the rate of growth slowed as the post COVID recovery became more mature. Omicron had little overall impact
• 2023 should see consumption recover, depending on the extent of monetary tightening in 2022. The report does not expect the BoE to hike Bank Rate as much as financial markets expect.
• So far, there has been some evidence of higher prices hitting consumption through March and April, though other data have painted a more resilient picture.
• The invasion of Ukraine in late February 2022 lifted energy prices further and is likely to result in substantial food inflation.
• Inflation expected to peak at c.9% y/y in April and remain elevated through 2022, with around half of this being delivered by food and energy alone (despite together forming c.17% of the basket).
• Elevated inflation, as well as fiscal measures, set to erode household purchasing power. Real disposable household incomes to fall by c.2% in 2022 and GDP growth is set to stall as a result.
• Inflation is set to start falling back in 2023, providing a tailwind to real incomes and economic growth. However, this will depend on monetary policy choices in 2022.
• By mid-2023, Bank Rate is expected to reach 2.5% according to financial markets and 1.5% according to analysts.
• The report expects two more 25bp hikes in June and August, before the MPC pauses at 1.5%. We also expect the BoE to start actively running down its balance sheet in early 2023.
• Although the Chancellor introduced support measures in the March Statement, the fiscal stance remains restrictive this year and next, with taxes set to increase.
• A noticeably tax rich recovery, however, has allowed the treasury to record strong tax receipts growth, creating headroom to provide further support if needed.
• Pace of fiscal consolidation likely to ease more than expected by the OBR as government grants further giveaways, possibly already in the Autumn fiscal event if energy prices continue to rise.

The report does sign post the threats but overall, the report walks the fine line between realism and noting the positives in the pictures. There has been times in past economies which have been darker but those economies never faced so many moments of shock and the unplanned. It is difficult to read the future as so much can still change but there are ground for optimism and opportunity.