State of the economy: May 2022

GDP growth outlook

The economic outlook is forecast to slow as the situation in Ukraine and global supply chain issues heighten inflationary pressures, reducing real incomes.

At a global level, economic damage from the situation in Ukraine is subject to significant uncertainty. In April the IMF projected that global growth would slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023 (down 0.8 and 0.2 points respectively on the January forecast).^[38]

In December, prior to the situation in Ukraine, the OECD forecast further recovery from the pandemic with global GDP growth of 4.5% in 2022 and 3.2% in 2023, while inflation was forecast to rise to 4.2% in 2022 and ease to 3% in 2023. Subsequent OECD illustrative model simulations in March suggest that global growth could be reduced by over 1 percentage point, and global inflation raised by close to 2.5 percentage points in the first full year after the start of the conflict.^[39]

At a UK level the Office for Budget Responsibility (OBR) March forecasts, revised down the UK GDP growth forecast to 3.8% in 2022 (revised down 2.2 percentage points from October) and 1.8% in 2023 with the downward revision in the near term reflecting higher inflation weighing on real incomes and consumption.

The OBR forecast inflation to rise to close to 9% in Q4 2022, mainly reflecting higher global energy prices, with higher inflation outpacing nominal earnings growth. Combined with net tax increases starting April, they estimate that this could result in real UK household disposable income per person falling by 2.2% in 2022-23.^[40]

More recently, the Bank of England forecast UK GDP to slow sharply this year as inflation weighs on real incomes and demand. The Bank forecast growth of 3.75% in 2022 (unchanged from February forecast), a fall of 0.25% in 2023 (down from +1.25% in February) and growth of 0.25% in 2024 (down from 1.0% in February). Inflation is forecast to rise above 10% in Q4 2022 and to remain high in 2023, before gradually falling towards the 2% target in 2024. ^[41]

The average of new independent forecasts in April (published monthly by HMT) forecast UK GDP growth of 4.1% in 2022 (unchanged from March forecast) and 1.5% in 2023 (down 0.1 percentage point on March).^[42]

At a Scotland level, in March, the Fraser of Allander Institute downgraded their forecast for Scottish GDP growth in 2022 to 3.5% (down from 4.7% in the December forecast), reflecting the impact on households and businesses of higher inflation, with growth forecast to moderate further at 1.5% in 2023 and 1.4% in 2024.^[43]

The Scottish Fiscal Commission will publish their latest economic and fiscal forecasts for Scotland on the 31^st May alongside the Scottish Government's Medium Term Financial Strategy and Resource Spending Review.