Chancellor warns war causing major economic uncertainty for the UK
RUSSIA’S war on Ukraine has created “significant economic uncertainty” for the UK, the Chancellor has warned ahead of his spring statement on the public finances.
Rishi Sunak was speaking after official figures revealed a better than expected bounce in January as the effects of the Omicron Covid variant began to ease.
The economy grew 0.8 per cent in the first month of 2022, more than making up for a 0.2% contraction in December, and far higher than the 0.1% rise in GDP that had been widely expected.
However some experts are now warning the invasion of Ukraine could tip the UK back into recession as it exacerbates the cost of living crisis.
Responding to the Office for National Statistics (ONS) figures, Mr Sunak said: “We have provided unprecedented support throughout the pandemic which has put our economy in a strong position to deal with current cost-of-living challenges.
“We are continuing to help people where we can, including through over £20 billion of support this financial year and next.
“We know that Russia’s invasion of Ukraine is creating significant economic uncertainty and we will continue to monitor its impact on the UK, but it is vital that we stand with the people of Ukraine to uphold our shared values of freedom and democracy, and ensure Putin fails.”
The warning of economic uncertainty comes as the Treasury gears up for the spring statement on March 23, when the Office for Budget Responsibility will produce its official forecasts on spending, debt, GDP, employment and wages.
Unlike the autumn budget, the spring statement does not normally contain major tax and spending changes.
However pressure is growing on Mr Sunak to respond to the worst cost-of-living crisis in decades, with spiralling energy prices driving up inflation, as well as tax rises and energy bill hikes due to bite next month.
Despite the Chancellor’s £200 loan to households to offset energy bills and the Scottish Government’s £150 discount for Band A to D council tax bills, The Institute for Fiscal Studies warns the war could see living standards suffer “across the board”.
With higher tax receipts likely to give Mr Sunak room for manoeuvre, he faces calls to help people more with energy bills and to cut fuel duty to lower record prices at the pumps, but will also have to fund increased military spending related to Ukraine.
Paul Dales, chief UK economist at Capital Economics, said although the economy had “rebounded with vigour” in January, “the cost-of-living crisis and the influence of the war in Ukraine probably means this is as good as it gets for the year”, with slower growth ahead in 2022.
He also predicted the Bank of England would raise interest rates from 0.5 to 0.75% next week to counter inflation, adding to mortgage and loan costs.
Suren Thiru, of the British Chambers of Commerce, said: “Russia’s invasion of Ukraine has increased the risk of a recession in the UK by exacerbating the already acute inflationary squeeze on consumers and businesses, and by derailing the supply of critical commodities to the economy.”
The National Farmers Union (NFU) urged the Government to act as “a matter of urgency” as rising gas prices hit UK agriculture.
NFU president Minette Batters told BBC Radio 4 yesterday: “We’re looking at the cost of a chicken now even 50% higher than it was this time last year.
“We’ve really got to look at the gas requirements for the whole industry and ask the Government that they do that as a matter of extreme urgency, and they pull together a marketing core group effectively that will monitor this situation with industry experts so we can plan and prepare, prioritise, and then look at where we potentially would want to intervene, because otherwise we are going to see less British production.”
She added: “We are seeing wheat prices go to a place that they have never ever been to before. Ukraine and Russia are massive exporters of wheat – 30% of global wheat is produced there.
“Commodity prices are driven globally, so of course it’s going to drive massive inflation.
“We have to act to make sure that that everybody, consumers, can have affordable food, but most importantly that we don’t contract production. That’s the essential bit – food supply and food production. With 60 million people you have to take it very seriously, you have to plan ahead.”
The transport industry called on Mr Sunak to cut VAT on petrol and diesel to ease the “really quite tough” situation for drivers.
Simon Williams, of the RAC, said: “Eight in 10 drivers would struggle to be without their car. The cost of filling up is over £88 for petrol and £92 for diesel.
“One thing [the Chancellor] could do is reduce VAT on petrol and diesel.
“At the moment, just the VAT, which is of course called a tax on a tax, is bringing 26 pence per litre so, bringing that back to 15% would instantly cut it by about 6p per litre.”
Darren Morgan, director of economic statistics at the ONS, said: “GDP bounced back from the hit it took in December due to the Omicron wave and is now 0.8% above its pre-pandemic peak.”
Boris Johnson tweeted: “I welcome today’s positive GDP stats, showing 0.8% growth in January and pointing to recovery in industries most affected by Omicron.
“Our economy is in a strong position to deal with current challenges and we’ll continue to support people where we can.”