Press release

9 May 2022

Further downgrades to UK growth with squeeze on business investment and consumer spending raising risk of recession, says EY ITEM Club forecast

Business investment forecast to grow 10% in 2022 – but from a weak starting point and £5.5bn down from the 12.7% growth expected in February’s Winter Forecast Consumer spending set to grow 4.9% in 2022 – down from the 5.6% forecast in February UK GDP forecast to grow 4.1% in 2022, 1.9% in 2023 and 2.2% in 2024, but significant risk of recession remains with households set to experience the biggest fall in real wages since 1977

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Related topics Growth
  • Business investment forecast to grow 10% in 2022 – but from a weak starting point and £5.5bn down from the 12.7% growth expected in February’s Winter Forecast
  • Consumer spending set to grow 4.9% in 2022 – down from the 5.6% forecast in February
  • UK GDP forecast to grow 4.1% in 2022, 1.9% in 2023 and 2.2% in 2024, but significant risk of recession remains with households set to experience the biggest fall in real wages since 1977

LONDON, MONDAY 9 May 2022 – Inflation, geopolitical uncertainty, skills challenges and increasing supply chain issues are continuing to squeeze the outlook for business investment, according to the new EY ITEM Club Spring Forecast. 

UK business investment is now forecast to grow 10% this year, having been expected to grow 12.7% in February’s Winter Forecast and 11.3% in March’s Interim Forecast. This represents an estimated £5.5bn shortfall from February’s forecast. With a sluggish recovery last year presenting a disappointing starting point for 2022, investment is now not expected to reach pre-pandemic levels until the end of this year. 

The EY ITEM Club has also downgraded the outlook for UK growth overall, with UK GDP now expected to grow 4.1% in 2022 – down from the 4.2% predicted in March – before growing 1.9% in 2023 and 2.2% in 2024. Growth will be dependent on under-pressure households continuing to spend by saving less and borrowing more – and the EY ITEM Club says that the possibility they may not raises the risk of recession. 

Hywel Ball, EY UK Chair, says: “Uncertainty about the pandemic has been replaced by geopolitical uncertainty, which has also had consequences for the cost of capital goods and supply chain frictions. The temporary super-deduction tax incentive should support an investment pick-up this year, but its impact is being countered by strong headwinds. 

“Some businesses also appear to be grappling with labour shortages and aren’t always able to access the talent needed to identify or deliver investment opportunities. At the same time, many large businesses are actually well-placed to invest, having paid down bank debt during the pandemic and built cash holdings which could can be used to fund new projects.” 

The EY ITEM Club estimates that, as of February 2022, UK corporates had accumulated approximately £150bn in extra cash holdings – 5.5.% of GDP – compared to what they would have had access to had pre-pandemic deposit trends continued. 

Hywel Ball adds: “Investment prospects could rely, in part, on the labour market outlook – and whether the pandemic-linked rise in non-participation can be reversed. Focusing on skills and talent will be key for businesses, society and the wider economy. Until business investment is unlocked, the UK economy will be even more dependent on consumers, who are facing their own challenges.” 

The UK unemployment rate fell to 3.8% in the three months to February 2022, but the number of ‘inactive’ working-aged people is 490,000 higher than two years ago, mainly because of rising numbers of people on long-term sick leave or taking early retirement. Employment is down by over half a million people compared to pre-pandemic levels. 

Consumer squeeze continues – and the risk of recession rises 

While the EY ITEM Club’s central forecast does not see the UK economy entering a recession, it warns that there is a “serious risk” of this happening later in 2022 if consumer spending does not meet expectations, or if October’s energy price cap review results in a higher-than-expected rise in bills. 

Consumer spending is now forecast to rise 4.9% in 2022, down from the 5.1% and 5.6% expected in March and February. Growth of 1.5% is predicted in 2023, down from the March and February forecasts of 1.7% and 2.9%. 

Inflation, meanwhile, is still expected to have peaked at 8.5% in April, while average inflation for 2022 is now forecast to be 6.7% (up from 6.5%), the highest level since 1991. With average earnings forecast to rise by just over 4% this year, British workers are set to see the biggest fall in real wages since 1977. 

However, consumer spending – and the economy – is expected to benefit from households continuing to release the almost-£180bn worth of ‘excess’ savings (8% of GDP) built up during the pandemic. The EY ITEM Club notes that the household savings ratio fell more rapidly in Q4 2021 than expected, falling to 6.8% from 7.5% in Q3 and a lockdown-induced 18.3% in Q1, but is still above the immediate pre-pandemic average of 4.9% (2017-19). 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The UK economy is not without supports. Momentum at the start of the year should help offset new headwinds to deliver calendar-year growth for 2022. The balance sheets of many households and businesses are unexpectedly strong, having built up a combined £300bn of ‘excess’ savings over the course of the last two years. 

“But accumulated savings are not a panacea for the economy. There is a significant risk that consumers, faced with a sustained squeeze on their finances, may cut spending in response. And while the rising cost of living will affect almost all households, some are more vulnerable than others. The distribution of savings built up in the pandemic is heavily skewed towards richer households, while lower income groups will be disproportionately affected by higher energy bills and benefits increases being outpaced by inflation this year. 

“The forecast for households improves significantly in 2023 and 2024, but we’re not there yet. Economic growth this year will depend heavily on squeezed households being willing to spend, which, in turn, will rely on falls in real incomes being offset by households saving less or taking on more debt. There is scope for households to do this but there are no guarantees consumers will come to the rescue.” 

The EY ITEM Club expects pressure on households to ease from next year. Energy prices are predicted to fall across 2023 and 2024, pushing down on inflation, which is forecast to average under 2% in 2024. The benefits uprating in April 2023 is likely to be over 7%, well ahead of prices rises. And while high inflation will mean the four-year freeze on tax allowances and thresholds will affect more taxpayers than intended, this will be mitigated by a 1p cut in the basic rate of income tax from April 2024.