The UK economy grew 7.5 percent in the final quarter of 2021 compared with the previous year, marking the fastest expansion since 1941. Historical data shows that economic growth affects investment. The rate of economic growth also affects the level of investment. Business investment tends to be quite volatile. If businesses see an improvement in economic forecasts, they will increase investment to meet future demand- private investors tend to follow the same path.
According to recent report from The Guardian, the U.K. economy expanded at the fastest pace since World War II last year after suffering a milder hit than expected in December.
The 7.5% expansion was the largest recorded since 1941, making Britain the fastest-growing advanced economy in 2021. The economy nonetheless remained smaller in the fourth quarter than at the end of 2019, before the pandemic struck.
Prime Minister Boris Johnson, who is grappling with a brutal cost of living crisis and facing calls to resign over alleged rule-breaking parties when the country was in lockdown. welcomed the news. This should also keep the Bank of England focused on efforts to curb surging inflation, with more interest-rate increases likely in coming months.
After suffering a deeper pandemic recession than its major peers, contracting 9.4% in 2020, the U.K. has enjoyed a stronger recovery, aided by billions of pounds of government aid to support jobs and firms through the crisis. The UK economy is forecast to outperform other Group of Seven nations once again this year.
Thanks to “our package of support and making the right calls at the right time, the economy has been remarkably resilient,” said Chancellor of the Exchequer Rishi Sunak.
Inflation forecast for 2022
According to a report from KMPG, inflation is forecast to remain elevated this year, and to peak at around 6.5% in April as the new regulated price cap on households’ gas prices takes effect. However, as energy prices gradually stabilise and supply chains recover, inflation is expected to moderate significantly by the end of this year, approaching the Bank of England’s 2% target by the start of Q2 next year.
However, the current elevated level of inflation could see the Bank of England act relatively swiftly this year in an attempt to stem any permanent rise in inflation expectations.
Three possible interest rate rises could be imposed in 2022; in February, August, and November. This would represent a shift towards a significantly tighter monetary policy stance when considering the implications these rises will also have for the divestment of assets accumulated under the QE programme in line with the MPC’s latest guidance.
The Bank of England may therefore have room to hold off further tightening next year, with only one additional rate rise in November, taking Bank Rate to 1.25% by the end of 2023.