- Monthly GDP data confirmed that the emergence of the Omicron variant caused a modest fall in output in December, primarily due to weaker activity in social consumption sectors.
- High-frequency data suggest that activity has rebounded as COVID-19 case numbers have fallen. But while the Omicron variant may have begun to recede, the squeeze on real incomes means growth is likely to be slower in 2022.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“GDP fell by a surprisingly modest 0.2% month-on-month (m/m) in December following the emergence of the Omicron variant. Though there were no economically meaningful restrictions imposed, there were significant falls in output in sectors such as accommodation and food (-9.2% m/m) and art and recreation (-4.4% m/m), as consumers restricted social contact and large numbers of people were forced to isolate. But the drag from social consumption sectors was mitigated by higher health output (+2.4% m/m), following a rise in COVID-19 testing and vaccinations, and another strong gain in construction output (+2.0%).
“December’s fall in output limited quarter-on-quarter (q/q) GDP growth in Q4 to 1.0%, keeping the quarterly measure of GDP just below its pre-pandemic level. On the expenditure side, consumer spending and net trade were the strongest contributors to growth in Q4, though the latter was largely due to volatile flows of non-monetary gold.
“High-frequency data suggests that social consumption has recovered in recent weeks, as COVID-19 case numbers have gone down. But while the downside risks from Omicron have receded, the recovery now faces the more conventional economic challenge of high inflation. And with consumers facing the biggest squeeze on spending power in more than a decade, the EY ITEM Club expects GDP growth to be much slower in 2022 than the upwardly revised 7.5% rate recorded in 2021.”