KPMG comments on today’s GDP data

“While UK GDP rose by 0.8 percent in January as the impact of the Omicron wave eased, growth momentum is likely to be derailed by the conflict in Ukraine, with higher and more volatile commodity prices and shortages of key raw materials affecting production and leading to higher inflation.

“Higher inflation will put downward pressure on demand. Our analysis shows that a 10 percent rise in the oil price together with a 50 percent rise in the price of gas could see a 0.5 percent reduction in UK GDP and a similar fall in other European economies. Latest developments therefore point at a sizable impact on GDP.

“Higher energy prices will particularly hit hard lower income households, which are already disproportionally affected by the rise in utility prices this April. Without further support from the government, the two expected increases in the gas price cap this year could see disposable income of the lowest income households fall by nearly 14 percent in the UK. Higher income households are likely to be less severely affected because they spend relatively less of their income on energy, although they will be more affected by the rise in National Insurance contributions.

“Further headwinds for the UK economy are likely to arise from the elevated levels of uncertainty, tighter financial conditions, and disruptions to trade, potentially reducing GDP growth to 3.3 percent this year and to 0.8 percent next year.

“The new sanctions and the uncertainty around the supply of some key commodities will be felt particularly in Europe, where some of the strongest trade links with Russia remain. Prior to the escalation, companies in the UK were reporting some easing in supply chain constraints, although they were still rising in the Eurozone. The latest developments are likely to reverse some of these gains.”  

 

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