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Inflationary pressures likely to subdue post-pandemic recovery.
Economic backdrop As Covid-19 concerns began to dissipate, the war in Ukraine has become a fresh source of uncertainty. The consequences of the sanctions on Russia and embargo on Russian oil and gas are multifaceted. In the UK, we are fortunately less reliant on Russian imports than our neighbours in Europe but the added pressure on household incomes as a result of commodity price increases and persistent inflation will still be considerable. UK GDP saw an annual rise of 7.4% in 2021 following a -9.3% fall in 2020 and at the end of March 2022 was 0.7% above its pre-pandemic level in December 2019. In the short-term, the rate of economic recovery is expected to be impacted on the supply side by disrupted supply chains and shortages of goods and labour and on the demand side by the cut in household incomes. Forecasters have revised down their GDP growth expectations for 2022 to reflect the impact of the crisis, which are now 3.8% for 2022 according to the Office for Budget Responsibility.
Quantitative easing and Government stimulus during the pandemic supported households and injected significant capital into the economy. As lockdowns ended and more and more businesses were able to reopen, consumer demand increased but this was not always matched with increases in supply, putting upward pressure on prices. The 12-month CPI inflation rate hit a new 40-year high of 9.0% in April 2022. The increase reflects the change in Ofgem’s energy price cap in April causing a jump in utility prices, alongside the rise in fuel and food prices as the agriculture sector faced increasing cost pressures. The Bank of England’s response to rising inflation has been a series of base rate increases from a historic low of 0.1% to 1.0% in May 2022, the highest level since 2009. Further rate increases are expected, together with a programme of quantitative tightening. Growth in average total pay (including bonuses) was 7.0% and growth in regular pay (excluding bonuses) was 4.2% among employees in January to March 2022. In real terms, total pay increased on the year by 1.4% and regular pay fell on the year by -1.2%. In terms of demand, there is still momentum from the reopening of the economy, particularly for the travel industry which is one of the last to see restrictions lifted. As workers have returned to the office, albeit in a more flexible capacity, this will hopefully create an increase in the consumption associated with business travel, city centre retail and leisure activity. Retail sales volumes are 4.1% above their level in February 2020, however did fall by -0.3% in the three months to April 2022, fuelling concerns that consumers are being hit by affordability pressures. The proportion of online retail sales stood at 27.0% in April 2022, remaining significantly higher than the 19.9% level in February 2020 before the pandemic. The end of the furlough scheme in September 2021 did not have a significant impact on unemployment. The unemployment rate has fallen below pre-pandemic levels and job vacancies are at a record high. The number of job vacancies in February 2022 to April 2022 rose to a new record of 1.3 million, an increase of 0.5 million from its January to March 2020 level. UK ten-year gilt yields have been on a generally upward trajectory since December 2021, but remain relatively low by historic standards.
Picton Property Income Limited Annual Report 2022
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