UK workers are facing a £1,400 hit to their real wages by the end of 2022 as the UK economy confronts a highly volatile and uncertain inflationary outlook, according to the latest PwC Economic Outlook.
Although PwC forecasts that the UK economy will continue to grow at a rate of between 3.1% and 3.6% in 2022 , the Big Four firm is also warning that the UK is likely to enter a recession as early as this year, followed by a period of negligible or negative growth through 2023 and 2024.
PwC believes the government’s recently-announced Energy Price Guarantee, which caps household energy bills for two years at £2.5k, will provide some certainty to households over the coming year. Meanwhile, the six-month business support scheme will provide some relief to businesses that are struggling to stay afloat in the face of rising energy bills.
PwC has subsequently revised its projections and forecast that inflation is already at or close to its peak of around 10% to 11%. “This is significantly lower than our expected peak of 17% in 2023 based on early September market implied energy price paths and without government intervention, when household energy bills were set to reach around £5k a year,” says Jake Finney, an economist at PwC.
Prior to the energy price cap announcement, PwC’s outlook projected that peak inflation could reach between 13% and an eye-watering 22% in 2023, with average annual domestic energy bills surging between £3,400 and £6,900.
Nonetheless, Finney says that, based on the projected path of inflation, PwC still expects that real wages could be around 5% lower than their 2021 levels by the end of 2022. “This means that the average worker will be around £30 worse off a week and £1,400 worse off a year,” he says.
Nick Forrest, UK Economics Consulting Leader at PwC, says that until gas markets regain stability, inflationary uncertainty will prevail, making it particularly challenging for businesses to plan, mitigate and adapt.
“There are profound social and economic challenges ahead for businesses and individuals. We can therefore expect a renewed focus on areas to boost productivity across the UK and deliver substantial economic growth in the long-term,” Forrest warns.
Meanwhile, Suren Thiru, Economies Director for ICAEW, has warned that a perfect storm of growing input costs for businesses, eye-watering energy bills and persistent supply constraints means that inflation could peak higher and later than the Bank of England predicts. “Record high price pressures suggest that the current inflationary surge will intensify considerably in the coming months.”
Thiru believes that the energy price guarantee announced by the new Prime Minister is a “double-edged sword” for inflation: “While the new scheme will cut the peak in inflation through keeping energy bills down, by stoking consumer demand through universally increasing household incomes it risks keeping inflation higher for longer.”
Growth outlook highly dependent on energy prices
PwC’s Economic Outlook prepared two possible scenarios reflecting geopolitical and economic uncertainty: PwC’s “mild winter” scenario, with UK growth of 3.6% this year, hinges on recovery of some supply of Russian natural gas exports, a reduction in gas prices to their September 2022 starting level, and the UK government providing considerable support in response to the cost of living crisis.
The firm’s “harsh winter” scenario would see growth of 3.1% by the end of 2022, followed by two years of slow, or even negative, real GDP growth. According to that scenario, the supply of Russian natural gas exports to Europe will remain highly disrupted, and UK government support would be less able to mitigate the adverse impact of high gas prices.
However, the headline growth figures mask significant regional disparity; London is likely to report above-average output growth of between 3.9% and 4.4% alongside the East of England (3.2% to 3.7%), while the South East will record close to par (3% to 3.5%).
All other regions are expected to under-perform the national average, particularly Yorkshire and The Humber (2.5% to 3%), Wales (2.4% to 2.9%) and the North East (2.1% to 2.6%) due to a higher reliance on low-productivity sectors such as retail and wholesale that are more exposed to cost pressures.
UK could gain £71.6bn through solving regional productivity gap
PwC’s analysis suggests that if all regions improved productivity to at least the national industrial median, this could potentially add as much as £71.6bn to the total UK output per year, representing around 3.4% of total GDP in 2023. The regional productivity gap measures Gross Value Added (GVA) differences in output per hour for each worker across the UK’s 12 regions.
Northern Ireland could potentially benefit the most from improving within-industry productivity and could see an extra 16% increase in regional GVA by closing this gap, while the North East and Yorkshire and the Humber each could potentially raise their regional GVA by 7% to 9%.
Hoa Duong, PwC senior economist, says: “The UK has consistently lagged behind other advanced economies when it comes to productivity, and currently sits fourth among the G7. Yet what these findings highlight is the extent to which this is a regional and sectoral issue which drives a national problem.
Duong says while the policy solutions will be specific to each region, “regional polarisation is driven by imbalances between skills, workforce demographics and regional income”.
Read the latest PwC Economic Outlook
Access ICAEW’s Business Confidence Monitor for Q3 2022, which surveys 1,000 chartered accountants in the UK.
Visit ICAEW’s Inflation hub for a closer look at the impact of inflation on people, businesses, accountancy and the wider economy.
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