Ukraine conflict weighs on UK growth

A mixed outlook for future economic growth in the UK - along with that in many other nations - has been thrown into question because of the conflict in Ukraine.

David Sapsted

8 March 2022

Surveys by the country's two largest business groups have shown that, while there had been a pick-up in activity up to the end of last month, the fallout from the Russian invasion has been compounded domestically by rising inflation and pending tax increases.The latest 'Growth Indicator' report from the Confederation of British Industry (CBI) showed that private sector growth had remained healthy in the three months to February, largely driven by an improvement across the consumer services sector and in manufacturing output.According to the CBI, the pace of growth across the private sector was predicted to quicken in the three months ahead, marking the first time since May 2021 that expectations were materially stronger than reported growth.The CBI reported, "Manufacturers, business & professional services and consumer services firms expected to see a quickening in growth over the next three months, while the distribution sector was set to keep pace with results seen over the quarter to February."Alpesh Paleja, CBI lead economist, said that the strengthening in expectations probably reflected fading fears over the effects on businesses of the Covid-19 pandemic.“However," he added, "the conflict in Ukraine has cast a shadow over business confidence. The subsequent rise in global commodity prices and supply chain pressures will have an impact across the economy, at a time when businesses are already grappling with significant challenges, such as raw material shortages and other rising costs.”Meanwhile, the 'UK Economic Outlook' for 2022 from the British Chambers of Commerce (BCC) has downgraded its expectations for GDP growth this year from 4.2% to 3.6%.Suren Thiru, head of economics at the BCC, said the downgrade in this month's forecast signalled "a significant" deterioration in UK’s economic outlook for the remainder of the year.“The UK economy is forecast to run out of steam in the coming months as the suffocating effect of rising inflation, supply chain disruption and higher taxes weaken key drivers of UK output, including consumer spending and business investment," he said.“Russia’s invasion of Ukraine is likely to weigh on activity by exacerbating the current inflationary squeeze on consumers and businesses and increasing bottlenecks in global supply chains.
“Our latest outlook suggests a legacy of Covid, and Brexit is an increasingly unbalanced economy with a growing reliance on household spending to drive growth. Such economic imbalances leave the UK more exposed to economic shocks and reduces our productive potential.

“The downside risks to the outlook are increasing. Russia’s invasion of Ukraine could drive a renewed economic downturn if it stalls activity by triggering a sustained dislocation of supply chains or a more significant inflationary surge. Tightening monetary and fiscal policy too aggressively risks weakening UK’s growth prospects further by undermining confidence and damaging households' and firms' finances.”