As we enter the new fiscal financial year, we wanted to highlight some of the compelling figures and statistics from 2021 and look ahead to what 2022 has in store for businesses across the UK. Extraordinary events over recent years, such as Brexit and the Covid-19 pandemic has made it challenging to predict what will happen to our economy in the future and now, with the growing concern of conflict in Eastern Europe, economists are worried that economic growth will become stagnant after showing real signs of bouncing back from the pandemic in 2021.
The UK economy advanced 7.5% in 2021, after contracting 9.4% in 2020, which is the strongest pace of growth since the second world war. Although growth was hindered by the Omicron variant in the last quarter of 2021, the Bank of England expects the impact to be “limited and short”, with the economy recovering during the first half of 2022. However, it is likely that this recovery will be dragged down during 2022 because of inflation, higher taxes, and surging energy costs.
The Inflation rate increased to 5.5% in February, and this is expected to reach 8% by the end of spring this year. Businesses are directly affected by inflation in two ways. When prices increase, businesses experience increased raw materials, manufacturing, and overhead costs and most of the increased cost will have to be absorbed to avoid losing customers. Moreover, when inflation rises, the purchasing power of consumers begins to erode, leading to a reduction in revenue for companies. To stabilize the inflation rate, the interest rate (bank rate) was increased to 0.25% in December last year and further increased In February and March to 0.75%. It is expected that the Bank of England will increase the bank rate further to 1.0% by May, and then to 1.25% by November this year. This will hopefully bring the inflation rate back down to the 2% target over the next few years.
Masked by the damaging effects of the Covid-19 pandemic, Brexit has been causing chaos to supply chains and productivity, and it is feared that the after-effects of our separation from the EU have still not been fully felt. It is estimated that GDP per capita is set to reduce by 4% due to the drop in productivity, in comparison to the 2% reduction caused by the pandemic. Unlike most world trade, UK-EU trade has failed to rebound during the first year of the post Brexit deal. Business owners have collectively shared their frustration with the reality of trading outside the single market and customs union.
One of the biggest obstacles that businesses will face during 2022 is the looming candidate shortage, as there is a sharp rise in demand for labour across all industries coming out of the pandemic and fewer EU candidates. In 2021 70% of businesses found staff recruitment extremely or very challenging with vacancies rising to a record 1.3 million at the end of the year. Recruitment intentions for businesses remain strong for 2022, however, 64% are anticipating problems fillings vacancies in the next 6 months. In response to the recruitment challenges employers have increased wages to attract new hires and advertised more jobs as flexible/hybrid working. A survey by RSM found that more than a third of businesses have had to delay expansion plans because of staffing shortages and left unchecked this could become a reality for many more businesses during 2022.
On a positive note, the unemployment rate has already returned to pre-pandemic levels reducing to 3.9% in the last quarter of 2021. Although surprising most economists, businesses were able to cope with the lockdowns better than expected. This was partially due to the financial support from the government though the furlough scheme and grants for small businesses. The Bank of England is predicting that unemployment will rise to 5.5% later this year as the government support schemes come to an end, but this is likely to fall again next year as the economy continues to recover.
So, what does 2022 have in store for businesses in the UK? Well, it’s hopefully a year for recovery! It’s likely that rising household bills and fuel prices will have an indirect impact on many small businesses across the country, however, as consumer spending increases and key industries (such as the entertainment and tourism industry) start to recover the outlook for the UK economy and businesses is looking positive.