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Plan B blows UK economic recovery off course

Leadenhall market
Leadenhall market

The imposition of Plan B in a bid to flush out a wave of Omicron cases whacked the British economy last month, reveals a closely watched survey released today.

Brits were encouraged to work from home and limit socialising in December, igniting a mass exodus from city centres and high streets, dealing a heavy blow to the UK services economy.

The British services industry notched its worst month for growth in nearly a year, according to IHS Markit and CIPS’ latest purchasing managers’ index (PMI). 

Activity plunged to 53.6 in December, down sharply from 58.5 in November.

The news came as City analysts today warned the British economy will struggle to get out of the mire in 2022.

Experts at Capital Economics, a consultancy, hiked their forecasts for inflation to peak at seven per cent this April, more than triple the Bank of England’s target.

Worryingly, inflation will not even come close to the Bank’s two per cent target in 2022, staying at four per cent next Christmas, and could even remain above target next year.

In response to rip roaring inflation, the Bank will hoist interest rates four times this year, lifting them to 1.25 per cent, the highest level since February 2009, Capital Economics said.

The consistent sky-high cost of living throughout this year will mean that “household real disposable incomes will be squeezed,” triggering a sharp pull back in consumer spending and tamping down on growth, warned Paul Dales, chief UK economist at Capital Economics.

The UK economy will expand 3.7 per cent this year, over one percentage point lower than the Bank of England’s forecasts, Dales predicted.

However, the economy could be shrinking right now, experts warned.

IHS Markit’s PMI is a more timely snapshot of the health of the UK economy, meaning it may signal what direction official GDP statistics are heading in.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, warned the poor PMI reading indicates weaker spending as a result of greater consumer caution and tougher virus curbs caused the economy to shrink 0.6 per cent in December. 

It may even contract 0.3 per cent in January, Dickens said.

Tim Moore, economics director at IHS Markit, agreed with her assessment, saying December’s PMI reveals the UK economy is suffering from “a severe loss of momentum”.