As 2021 drew to a close, the Covid-19 pandemic and its consequences continued to affect economies.

The first case of the Omicron variant was reported in South Africa at the end of November 2021. It quickly spread and some counties began to reintroduce restrictions and offer booster vaccine shots. As before, the measures taken to reduce the spread of Omicron affected many businesses, particularly those in the travel and hospitality sectors.

The Organisation for Economic Co-operation and Development (OECD) also warned that surging inflation could undermine global recovery. The OECD predicts that price pressures will peak in early 2022.

UK

Headline figures from the UK paint a gloomy picture, but there are signs that the economy is getting back on track.

In October, the UK economy grew by just 0.1%. Growth forecasts for 2022 have also been revised down. The CBI now predicts the UK will grow by 5.1%, which compares to the organisation’s previous forecast of 6.9%. Accounting organisation KPMG has an even gloomier outlook and predicts growth of just 2.6% in 2022.

The Bank of England (BoE) warned that UK inflation would comfortably exceed 5% by spring 2022. In response, the BoE’s base interest rate was increased from 0.1% to 0.25%. While only a minor increase, the decision may be part of a long-term plan to gradually increase interest rates from historic lows.

Figures suggest that despite soaring costs, businesses are growing. Data from IHS Markit PMIs found:

• Soaring cost pressures are continuing to hit UK manufacturers. Factories saw prices rise at their fastest pace in at least 30 years, since records began. Firms also reported ongoing shortages of components, commodities, and labour. Despite these challenges, the PMI rose from 57.8 in October to 58.1 in November, showing that growth is becoming more rapid.
• The construction sector is facing similar difficulties. However, the PMI also shows the pace of growth is rising, as the measure increased from 54.6 to 55.5 in November.
• Export sales have supported service sector businesses, with the PMI reaching 58.5. Demand for services and businesses trying to offset rapid inflation led to the prices charged by providers increasing at the fastest rates since the survey began in 1996.

In December, the English government introduced “Plan B” to slow the spread of Omicron. While England avoided another full lockdown, restrictions did affect businesses, particularly those within the travel and hospitality sectors. Scotland and Wales introduced stricter measures that also affected business operations. In 2022, the spread of Omicron could lead to governments taking more stringent steps.

Brexit is also set to affect firms in 2022. From 1 January 2022, there will be new customs checks. The International Monetary Fund (IMF) warned that the UK still faces post-Brexit trade challenges, while a poll from the Institute of Directors indicates that many firms are not prepared. The survey found 3 in 10 importers described themselves as “not at all prepared” for the changes to border checks.

Europe

Overall, data suggest that eurozone growth is picking up, but the figures also hide subdued growth in some sectors.

The PMI for output was 54.2 – a figure above 50 suggests that the economy is growing. However, the data mostly reflects the resilience of the service sector, as manufacturers are being held back by supply shortages.

Factory orders in Germany, the eurozone’s largest economy, also suggest that growth could be more subdued in the coming months. Orders fell by 6.9% in October, which was much worse than expected. The country’s economy is being affected by weaker overseas demand.

This month, Turkey featured in headlines as the country’s central bank was forced to stage an intervention to prop up the ailing lira. President Erdogan defended his economic policy of low-interest rates despite the currency losing value and inflation climbing.

The European Commission is set to propose stricter labour rules to regulate the gig economy. If introduced, the rules could seriously affect the profitability of some firms, including those that have done well during the pandemic, such as food delivery services.

US

The US also continued to battle rising inflation and supply chain challenges.

The rate of inflation in 2021 was 6.8%. The figure is the highest since 1982, according to the Bureau of Labor Statistics. The rising cost of living is putting pressure on US families and businesses, and on the social spending bill that president Biden is trying to pass.

Job figures show that there are more openings in the US, with around 210,000 jobs added to the economy in November. However, this is far less than the expected 550,000, as a record 4.5 million Americans quit their jobs in November.

Asia

In China, imports surged by 32% year-on-year in November to around $254 billion (£187 billion) as firms tried to restock depleted commodities. Export growth slowed and grew by 22% to $326 billion (£240 billion) but was stronger than forecasted.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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