UK business investment is forecast to grow 10% in 2022, down from expected 12.7% growth predicted by EY Item Club’s February Winter Forecast and 11.3% in March’s Interim Forecast. This represents an estimated £5.5bn shortfall from February’s forecast.
According to the EY Item Club Spring Forecast, inflation, geopolitical uncertainty, skills challenges and increasing supply chain issues are continuing to squeeze the outlook for business investment. Investment is no longer expected to reach pre-pandemic levels until the end of this year.
The firm has also downgraded the outlook for UK growth overall, with UK GDP now expected to grow 4.1% in 2022, down from the 4.2% predicted in March, before growing 1.9% in 2023 and 2.2% in 2024.
Growth will reportedly be dependent on under-pressure households continuing to spend by saving less and borrowing more. EY said that the possibility of households not doing this will raise the risk of recession.
Consumer spending is now forecast to rise 4.9% in 2022, down from the 5.1% and 5.6% expected in March and February. Growth of 1.5% is predicted in 2023, down from the March and February forecasts of 1.7% and 2.9%.
Meanwhile, inflation is still expected to have peaked at 8.5% in April, while average inflation for 2022 is now forecast to be 6.7% (up from 6.5%), the highest level since 1991. With average earnings forecast to rise by just over 4% this year, British workers are set to see the biggest fall in real wages since 1977.
Hywel Ball, EY UK chair, said: “Uncertainty about the pandemic has been replaced by geopolitical uncertainty, which has also had consequences for the cost of capital goods and supply chain frictions. The temporary super-deduction tax incentive should support an investment pick-up this year, but its impact is being countered by strong headwinds.
“Focusing on skills and talent will be key for businesses, society and the wider economy. Until business investment is unlocked, the UK economy will be even more dependent on consumers, who are facing their own challenges.”
Martin Beck, chief economic advisor to the EY ITEM Club, added: “But accumulated savings are not a panacea for the economy. There is a significant risk that consumers, faced with a sustained squeeze on their finances, may cut spending in response. And while the rising cost of living will affect almost all households, some are more vulnerable than others.”