Overall, the UK economy has continued to strengthen since the start of the pandemic. Headline concerns since the last macroeconomic update encompass: Russia’s invasion of Ukraine (resulting in economic sanctions on Russia and wide ramifications for the global economy); high prices of commodities (crude oil, natural gas and wheat for example), and the high levels of inflation both in the UK and globally.

Based on lagged data reported by the UK’s national statistician (the Office for National Statistics “ONS”) the UK economy continues to expand according to standard measures. GDP growth increased by 0.8% during January 2022, compared to a 0.2% decline in December 2021 (where consumption and production were impacted by Omicron concerns and restrictions). This means the UK produced/ consumed more good and services than the previous month. Additionally, all sectors grew in January 2022, with services up 0.8%, production up 0.7%, and construction up by 1.1%.

The UK employment rate increased by 0.1% on the quarter to 75.6% as the labour market continues to recover with the number of job vacancies rising to a new record in February 2022 of 1,318,000. Despite the unemployment rate decreasing marginally, the inactivity rate increased slightly due to the long-term sickness of individuals and "other" reasons.

Unfortunately for workers, growth in total pay was just 0.1% and regular pay fell on the year by 1.0% in November 2021 to January 2022 in real terms. This means that despite nominal (headline) wage growth of 3.8% (4.8% including bonuses) after the effects of increasing prices for individuals (inflation) workers had less relative income than before.

To contextualise the inflation figures: the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 5.5% in the 12 months to February 2022, up from 4.9% in the 12 months to January. The Consumer Prices Index (CPI) rose by 6.2% in the 12 months to February 2022, up from 5.5% in January. Both measures are the UK’s reported inflation metrics however typically CPIH better reflects the inflation impact including housing costs.

To help remedy the increasing inflation in the economy in March 2022, the Bank of England raised the Bank Rate from 0.50% to 0.75%. This form of monetary policy is commonly used to address inflation theorising that increasing interest rates should reduce demand in an economy and in turn reduce price pressure by “squeezing” consumers. Typically the Bank of England aims to maintain a target rate of 2% per annum.

In Quarter 4 2021, output per hour worked grew by 1.0% on the previous quarter, corresponding to an increase in GDP figures. With a reduction in real wage growth and increased output per worker however, it is difficult to see direct human benefits as a result of the expansion.

The increase in inflation over the year can be attributed to disrupted supply chains and increasing consumer demand due to covid, resulting in supply and demand imbalances. The official impacts of the Russian/ Ukraine invasion are yet to feed through to the national statistics, however as Russia is a key supplier to the UK (and globally) for various commodities, it is expected this could have additional inflationary effects.

Further impacts of what the Russian sanctions could mean for us and the rest of the world can be found on the Young Fabians blog.

This post was authored by Chandni Rajput, Executive Committee member of the Young Fabian Economy and Finance Network.

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