UK economic growth projections cut as households face biggest fall in household disposable income for decades - PwC Economic Outlook

• UK economic growth now expected to be 3.8% in 2022, revised down from 4.5% projected before Russian invasion of Ukraine

• Outbreak of war and introduction of economic sanctions have added one percentage point to inflationary outlook, and set to reach a peak of 8.4% in the second quarter of 2022

• Average UK household set to be £900 worse off this year, with lowest earners facing potential £1,300 fall to their incomes as real wages fall by around 2%

The UK economy is set to grow at a smaller-than-expected rate in 2022 with the Russia-Ukraine war intensifying inflationary pressures on businesses and households, according to new analysis from PwC.

PwC’s UK Economic Outlook has projected that growth may now reach 3.8% in 2022, compared to an expected rate of 4.5% before Russia’s invasion of Ukraine.

Meanwhile, inflation is now set to peak at 8.4% in the second quarter of 2022, and average 7.4% throughout the year. This represents a 1 percentage point increase from the pre-war estimated rate.

The report also includes modelling for an ‘economic escalation’ scenario, which would include a substantial disruption to Russian exports of oil and gas. In this scenario, UK economic growth would be downgraded to 2.8%, and inflation could peak at 11% (with an average of 8.3%).

At present, the increased inflationary outlook is set to contribute to pressures on UK households, with energy prices rising from 1 April, with the potential to rise again in October when the price cap is reviewed. It is predicted that there could be a fall in real wages of 2% in 2022 as inflation outpaces wage growth, and could leave the average UK household £900 worse off this year.

Nick Forrest, UK Economics Consulting Leader at PwC, says:

“Beyond the tragic humanitarian impacts of the war in Ukraine, there are wider economic consequences, as Russia and Ukraine are key exporters of commodities such as car batteries, food and fertiliser. Russia is also a major energy supplier. It is clear that many households and businesses will be feeling great pressure from rising costs this year.

“Were further sanctions introduced in response to pressure to rapidly curtail the use of Russian oil and gas, the UK economy would continue to grow, but the pace of growth would be significantly slowed. The UK is not yet facing a growth crisis, but it is facing an inflation crisis.” 

UK could face historic fall in household disposable income

CPI inflation reached 6.2% in February 2022, the highest level in three decades, with around half of the contribution to the headline inflation being driven by fuel, food and electricity prices. Yet PwC’s analysis expects inflation to average 7.4% in 2022 in its main scenario, with a peak of around 8.4%.

Barret Kupelian, senior economist at PwC, says:

“Households and businesses were already facing significant cost of living pressures before the Russian invasion. These will continue to intensify in the coming months. We expect real wages to contract by an average of at least 2% this year, as inflation continues to outpace wage growth. 

“Food and energy price hikes typically act like asymmetric tax hikes on households as its users cannot materially cut back on its consumption. Our current projections show UK households will be around £900 worse off this year. Those on the lower end of the earnings scale will be impacted by an even larger amount, around £1,300, as they are more vulnerable to price rises for food and energy.

“This will act as a headwind to economic activity as households cut back on spending in other areas.”

Energy price cap to rise again in October

The energy price cap rose by 54% in April 2022, and PwC’s price cap model predicts that it may rise again by around another 36% in October, to £2,700. In the event of economic escalation scenario, it is estimated the cap could rise to £3,500.

Ends.

Notes to editors:

1. The full UK Economic Outlook can be found here https://www.pwc.co.uk/services/economics/insights/uk-economic-outlook.html 

2. To request an interview or more information please contact david.bowden@pwc.com