Gloomy growth forecast sparked by soaring costs

BRITAIN’S 2021 economic growth forecast will be downgraded tomorrow by the EY ITEM Club think tank, from 4.9 to 4.2 per cent due to soaring energy and commodities costs.

Additionally, the influential think tank will update its forecast for UK gross domestic product (GDP) growth for next year, downgrading it from 2.7 per cent to 1.9 per cent.

Inflationary pressures were already acting as a drag on the economy and Russia’s invasion of Ukraine has pushed energy and commodities prices higher. As a result, the ITEM Club, which uses the Treasury’s models to produce its forecasts, will warn that inflation is likely to be higher and persist for longer than expected.

Instead of peaking at 7.2 per cent next month, it now believes that Consumer Price Index (CPI) inflation will hit a 30-year high of 8.5 per cent in April, before falling to 6 per cent by the end of the year and will not get back to the Bank of England’s 2 per cent target until late 2023.

Hywel Ball, UK chair of EY, will say that although the UK economy was in relatively good shape at the start of 2022, “the weaker outlook now reflects an assumption that energy prices will be higher for longer, adding to the cost of living and inflationary pressures”.

Next month the price cap set by Ofgem will rise 54 per cent, putting pressure on the finances of millions. The think tank says that this will disproportionately hit lower-income households hardest, as the CPI inflation rate for them will effectively be 10 per cent, and that they will feel its effects well into 2023.

With annual pay growth estimated to rise by 4 per cent pre-tax, it says that the cost-ofliving crisis will intensify for those on low incomes.

The ITEM Club’s downgraded GDP forecasts reflect the fact that the inflationary squeeze on living standards will hit consumer spending, which accounts for a big chunk of the economy.