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Summer 2022: What’s happening to the UK economy?

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.

Recent figures for the UK took many people by surprise. Following two months of falling GDP (0.1% in March and 0.3% in April), the economy grew by 0.5% in May. The question, of course, is whether this marks a temporary rise before a sharper fall over the following months, possibly leading to recession. Households are keen to understand more about what is happening so that finances can be appropriately prepared for any possible negative outcome.

In this article, our financial planners at Castlegate in Grantham, Lincolnshire offer an overview of what is happening in the UK economy as we enter summer 2022. We include some thoughts on how developments could affect your finances and preparation ideas to discuss with an adviser. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:

01476 855 585


A high tax burden

With the Conservative leadership contest currently taking place, many candidates are keen to showcase how they will cut taxes if they win. However, the Institute for Fiscal Studies (IFS) claims that tax cuts could contribute to inflation (which could hit 11% later this year) and would require taking out more government debt.

Indeed, the British public currently faces the highest tax burden in nearly 70 years (approaching 35.5% of GDP) and this follows 1,651 tax changes since 2010 – roughly one change every three days. As things stand, this trend seems unlikely to reverse soon, even if certain tax-cutting ideas may be implemented this/next year (e.g. a 50% VAT cut on fuel).

This means that households will need to engage in even more careful financial planning to save on needless taxes and put more money back in their pockets. Ideas include maximising the ISA allowance, capital gains tax (CGT) allowance and pensions annual allowance.


Rising household bills

Frustratingly, it is not just rising taxes that are eating away at payslips. Inflation – the overall rise in the cost of goods and services in the UK economy – is also putting pressure on household budgets. The main driver, at present, is the increasing cost of energy which means higher prices at the pump, higher utility bills and higher bills when shopping (due to the greater input costs for businesses, which often pass these down to the customer).

Unfortunately, much of the situation is driven by global forces which are outside of government control (e.g. market reactions to the Russian invasion of Ukraine). Some support has been promised in the form of a £400 energy discount in October 2022, but this will not alleviate the expected £800 rise in bills expected by Ofgem when the regulator adjusts the price cap.

For many households, coping with rising inflation will mean taking a hard look at the monthly budget and cutting back on some luxuries. Another idea is to invest in making your home more energy efficient (e.g. double-glazing and roof insulation). Bear in mind that you are likely to need to use more energy in the colder winter months ahead.


Global headwinds

At this point, you may be hoping for some good news! Whilst it is important to recognise that the UK economic outlook is not positive at the moment, the government has a range of options to keep the country moving towards growth (protecting jobs and business stability along the way).

One of the effects of rising inflation is that the pound (GBP) falls in value. In 2022, the GBP has already fallen by 10% against the dollar (USD). This is not a disaster for the UK, as it makes our exports seem cheaper. However, it does make inflation worse (due to our reliance on imports for food and other goods).

What is concerning is the Bank of England’s (BoE) latest Monetary Policy Report, which shows a central forecast of 0% UK economic growth until 2025 (within a 5% and -5% window). The inflation projection also does not expect inflation to return to “normal” levels (near 2%) until 2024. This is reinforced by projections by the OECD, which expects 0% UK growth in 2024 (although a more positive 3.6% forecast for next year).

The UK faces problems due to its highly “open” economy which, as a net energy importer, makes it vulnerable to price movements and supply issues. Manufacturing, transport and storage, mining and agriculture are particularly important aspects of the economy and are highly energy-intensive. To promote more energy independence, the UK will need to consider investing in renewables, bioenergy, waste and possibly nuclear – enabling us to better navigate global economic forces and meet its national “green” or “net zero” targets (whilst meeting national energy demand).


Conclusion & invitation

Although we would love to be optimistic, as financial planners we need to present the honest picture as we see it. At this stage, we can say with greater confidence that the UK economy is likely to enter a period of recession in the coming months (although nothing is certain). This would not be all bad news for investors (e.g. since foreign investments are likely to rise in value as GBP falls), but it should spur households to seek financial advice and ensure they are in the best possible position to weather possible coming storms.

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 855 585