UK Economy Shrugs Off Omicron But Inflation Will Prove a Bigger Challenge

Main Points

• Strong economic growth is now forecast to lead to growth of 1.3 per cent in the first quarter of 2022, with the Omicron variant confirmed to have left little impact on the level of UK economic activity compared with previous waves
• With the war in Ukraine and expected long-term elevation of energy prices likely to affect the economy in the coming months, we forecast growth of 0.5 per cent in February and 0.3 per cent in March
• While the UK economy as a whole is now 0.8 per cent larger than it was before the pandemic, there are large variations across sectors. Consumer-facing services and production are still well below (6.8% and 2.0%, respectively) their pre-pandemic levels while all other services and construction are now well above (3.4% and 1.4%, respectively)

“January’s strong GDP reading confirms that Omicron had a far smaller economic impact than previous waves of Covid-19. The wholesale and retail sector recovered strongly, regaining most of the ground lost in December. Manufacturing and construction both recorded their third straight month of growth after the supply chain constraints of the summer. With inflation likely to bite more as the first half of 2022 progresses, January’s growth could be the fastest we see for some time.”

Rory Macqueen
Principal Economist, NIESR

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