State of the economy: October 2022

Introduction

Economic conditions have deteriorated rapidly since the start of 2022 at a global and domestic level. The war in Ukraine has interrupted the gradual recovery from the pandemic, causing an energy supply and inflationary shock which is expected to push the economy into recession.

At a global level, inflationary pressures have been building since last year as the economy has been recovering from the pandemic and the supply side of the economy has been slowly adjusting to the rebound in demand. Global supply chains continue to be disrupted by the pandemic, particularly in China where the zero-Covid strategy continues to require regional lockdowns.

These inflationary pressures were initially expected to be largely temporary as the economy adjusted to post-pandemic conditions. However, the war in Ukraine at the start of 2022 has exacerbated and further destabilised the recovery on the supply side, placing further significant upward pressure on international commodity prices across food, metals and particularly energy. While commodity price rises across food, metals and oil have eased slightly in recent months (though remain significantly higher than their levels last year), wholesale energy prices, particularly gas, have remained particularly elevated and volatile.

Furthermore, the recent indefinite closure of the Nord Stream 1 natural gas pipeline into Germany presents a further negative gas supply shock into Europe, which has further driven up gas prices and ultimately raises the risk of supply shortage.

The combination of these factors has fundamentally weakened the economic outlook. The economy is now expected to enter a much more lengthy period of high inflation and fall into recession, reflecting the negative impacts on the demand side of the economy and an extremely challenging outlook for households and businesses.