Build back wiser
We are predicting 2022 to be a year of recovery, as the UK economy hopefully pulls clear of the Covid pandemic* and sees a release of pent-up demand. In particular, we see the rebound favouring the ‘fun industries’, like Leisure, Hospitality, the Arts and Tourism. Nevertheless, there will be headwinds, such as rising inflation and supply chain bottlenecks, although we expect these to ease in the second half of the year.
Oxford Economics are forecasting GDP growth during 2022 of 5.4%, which under normal circumstances would be an exceptionally high level of growth for the UK. Pre-Covid GDP growth (using the ten years to 2019) averaged 2.0%. Part of the reason for the strong figure for 2022 will be the base effect – whereby a statistic driven low in a downturn will appear to expand rapidly by just returning to normal – as the pandemic restrictions weighed on output for much of 2020 and a significant part of 2021. Our expectation is that GDP will return to pre-Covid levels in early 2022, resulting in growth above and beyond the reabsorbing of spare capacity.
To set against this buoyant growth outlook, there are the significant headwinds that emerged in 2021, that are set to persist into 2022, namely rising inflation and supply chain bottlenecks. While most commentators are forecasting inflation to peak in the first half of 2022, there is also an expectation it will then quickly recede in the second half. Our detailed analysis on the inflation outlook is found here.
We also expect supply chain issues to reduce from the Spring onwards as Covid recedes and lifts pressure on staff numbers at ports, factories and logistics firms. A freer flow of goods and manufactures should continue to underpin the strong demand for warehousing – although that will be tempered by the tight supply within the sector. Another potential risk is that policymakers may hike interest rates by too much too soon, although the Bank of England’s recent statements point to a gradual tightening of policy.
‘Fun’ industries to surge
We are mostly upbeat on the consumer side of the economy, as pay growth was strong and savings levels were high in 2021. Unemployment has remained low at 4.3% in October 2021, and job vacancies reached a record 1.2 million posts, so job security is currently high. This puts consumers in a stronger position in 2022, indeed Oxford Economics are predicting consumer spending to rise by 7.7% in 2022, the strongest increase in over 20 years. This will be supported by a 36% fall in personal savings, releasing £64 billion into the economy. We see this outweighing some of the downwards pressures on incomes in 2022, like the rise in National Insurance payments and the cut to Universal Credit.
Very strong output growth is expected in 2022 from the ‘fun’ industries, like Accommodation & Food Services (28.9%), and Arts Entertainment and Recreation (17.2%). This is partly due to base effects as these were the sectors hardest hit by Covid restrictions. However, both sectors are forecast to rise above pre-Covid levels, due to a release of pent-up demand now that the leisure and cultural sectors are able to trade without significant restrictions. This will be good news for Hospitality and Leisure property, which had become embattled sectors during the pandemic.
Turning to retail spending, Oxford Economics are forecasting retail sales to rise by just 1.3% in 2022, compared to 4.3% in 2021. For the first half of the year, supply constraints will continue to cut into sales of big ticket items, dampening retail sales growth. From a property perspective, it should also be remembered that growth in retail sales now partially affects logistics property, not just shops, with around 26% of transactions taking place online in October 2021.
GVA GROWTH BY SECTOR
Strong growth is also predicted for the Information & Communication sector, which is forecast to grow by 6.4% in 2022, up from 3.4% in 2021.
We expect tech firms to gain from the switchover to 5G, clearing the way for the Internet of Things. Also, we see labour shortages across the advanced economies prompting a corporate drive on automation, which will increase demand for software, tech services and robotics. All this should have a positive impact on Office and Industrial real estate.
The aftermath of COP26 will also contribute to growth in 2022. The Climate Change Committee estimates £1.4 trillion of investment is required to transition the UK economy to carbon neutral by 2050. New regulations, such as the requirement that all commercial buildings have an EPC rating of B by 2030, will require extensive refurbishment work across the UK. This will drive activity in the construction sector and engineering industries, in turn creating demand for Industrial and Logistics property. The R&D side of the Green revolution should buoy further demand for lab space.
2022 % GVA GROWTH BY CITY
Continuing the theme of the rebound from the pandemic, we also expect cities to record strong growth in 2022. Oxford Economics are predicting London plus eight of the Big Nine cities to outpace the wider UK on output growth in 2022. All the Big Nine cities and London are forecast to finish next year above their pre-Covid economic peak. Manchester is predicted to see the highest growth in 2022 at 6.5%, while Bristol is forecast to exceed its pre-Covid GVA level by the highest margin.
Cities will come back into their own in 2022 as their cultural and leisure scenes revive, with the twin benefits of drawing in more visitors and encouraging workers to return to city centres, creating a virtuous circle for these industries.
The UK economy looks set for a year of solid recovery, moving it above pre-Covid GDP levels. However, that will still leave GDP around 4.0% smaller than if it had continued on its pre-2020 trend growth rate. We believe the recovery will see an acceleration of favourable trends that had already begun before Covid; such as the move towards high productivity industries like tech, and the rise of green industries. In good news for the levelling up agenda, we are also predicting growth to be distributed more evenly around the UK compared to the previous economic cycle.
These new trends will raise productivity, lower climate risk and close economic gaps. They present an opportunity for the UK to build back wiser.
*At the time of release, the Omicron variant has only recently emerged, and the scientific world is starting to assess the implications for infection rates and severity of illness. Our forecast assumes that Omicron will be a variant that can be controlled without either a work from home order or lockdown. A work from home order would probably pushback the forecast timeline by approximately three months. A lockdown would be a major risk to our forecast.