2022 will be a crunch year for Britain’s economy from the post-Brexit and COVID-19 fallout, yet the economic situation could have a political impact. This week’s perspective forecasts what the economic and political trends of 2022 could be.
UK Economy - Professor John Bryson
It is intriguing to reflect on text written at the end of 2020 that speculated on key trends and patterns for the UK economy for 2021.
This text highlighted that there would be a continued shift to online consumption and that by mid-2021 the UK economy would, with vaccination, enter a period of post-pandemic recovery with a predicted uplift in consumer expenditure on hospitality and travel by the end of the second quarter of 2021. Post-Brexit discussions were highlighted included continued discussions on financial services between the UK and EU.
The outcome is that the UK, and all other countries, are still very much in the throes of the COVID-19 pandemic. All countries and people must become used to living with COVID-19 and to living with pandemics. It is important to remember that there will be more pandemics.
On 12 August 2020, my forecast for the UK economy was ‘that there will be a period of significant economic growth from 2023’. This period of significant economic growth might now occur later than 2023 given the ongoing impacts of COVID-19, but it will occur given the increase in employment, wage inflation linked to skill shortages and the increase in household savings. The UK household saving rate peaked in July but is still much higher than pre-pandemic times. Ultimately, these savings will underpin a period of growth.
Ongoing discussions between the UK and the EU have continued to be complicated by fish, and discussions regarding the Northern Ireland Protocol. In 2022, the EU will have to adjust to Germany’s new three-way coalition and to the continuing fallout from the ongoing 2022 French presidential election. Currently, Brexit is being politicised by France to underpin a national rather than international agenda and the likelihood is that the new German government will adopt a similar approach. This is unfortunate and it is time for all EU member states to accept that the UK has left the EU.
In late 2021 members of the World Trade Organization (WTO) agreed on what will be a transformational deal that will reduce costs related to service trade transactions by around £113bn per year. The signatories included the UK, US, EU, and China. The UK will be a major beneficiary as it is the world’s second-largest exporter of services. Core sectors that will benefit include banking, information technology, telecoms, engineering, and architecture. This deal highlights that the UK is playing an increasingly international game rather than a predominantly EU focused game. Thus, this new WTO agreement supplants some of the UK-EU ongoing discussions on service trade.
There are a series of supply constraints that may temper UK economic growth in 2022. These include skill shortages and hard-to-fill vacancies, energy price inflation and its impacts on households and companies, and supply chain disruptions. There is also the ongoing impacts of COVID-19, and new variants. Nevertheless, consumption will drive economic growth in the UK in 2022, unemployment will continue to decline, but inflation will increase linked to higher energy and commodity prices and supply shortages.
It is important to place living with this pandemic in the context of climate change. Thus, the focus must increasingly be on decarbonising production and everyday living in the UK. The next decade will be one of rapid and revolutionary change as governments, consumers and companies begin to take climate change seriously.
UK Politics - Dr Matt Cole
Prime Ministers’ room for manoeuvre declines over time like the space around a flooding island. The inlets of parliamentary rebellion, media criticism and party division fill up at different times, and electoral wins can dam them temporarily, but the waters still rise. Many commentators see 2022 as Johnson’s king tide. Where is the pressure coming from?
In Parliament, the PM has suffered rebellions over social care, parliamentary standards and Plan B. These drew in MPs from different quarters of the Conservative Party, but a hard core of critics is developing in a way reminiscent of the decline of premiers Major and May.
COVID-19 restrictions and the immediate effects of Brexit are stifling economic growth when the government needs to start recovering the costs of its pandemic response. Anticipated cost-of-living pressures in 2022 will prove hard to explain in the ‘red wall’ seats with already-fractious MPs.
Sleaze is the seal on this knot of problems. In stable, prosperous times Christmas parties and second jobs can be ridden out as exceptions to a general rule of competence; but when a pattern of controversy plays out against a background of hardship, the accusation of hypocrisy bites hard.
The PM’s over-promising enthusiasm, whether over Brexit, levelling up or COVID-19 has ground his and his party’s poll position into the red, and for the Conservatives, nothing is so unpopular as not being liked by the public. In time for May’s huge local elections, he needs to change that image, and hope that two threats stay away: a stronger opposition; and a rival on his own side.