Explore our latest analysis of the UK economy, which focuses on how we expect the war in Ukraine will impact UK real GDP growth and consumer price inflation.
Expected annual UK real GDP growth in 2022
Potential peak in UK inflation
Potential fall in real wages in 2022
Despite the recovery of the economy from the pandemic and the Government's move to a ‘Living with COVID’ plan, the impact of the war in Ukraine is expected to slow growth in the UK and other advanced economies.
Earlier this year, the UK economy had confidently grown beyond its pre-pandemic size and most sectors of the economy were growing. The UK labour market was running hot, with the unemployment rate dropping below 4% and the Bank of England starting to raise its base rate back to levels experienced before the pandemic.
Since then, the war has presented a significant shock to the global economy and is expected to impact the UK economy in three key ways:
Of these, we expect higher commodity prices to have the biggest impact on the UK economy. So far, the economic impact from the financial contagion and trade and investment channels appears to be contained and relatively small.
The UK growth outlook has deteriorated. Our outlook is based on two scenarios with different assumptions on how our reliance on Russian crude oil and natural gas will be resolved, along with more detailed assumptions on military performance and the nature of economic sanctions.
Depending on the scenario, we expect UK GDP growth to average between 2.8% - 3.8% this year, compared to a previous consensus GDP growth of 4.5%. The main driver of our revision is slower household consumption which is, in turn, driven by higher commodity prices. Real earnings are already contracting in the UK and are expected to continue to do so until at least the end of this year, with lower income households being disproportionately impacted.
Source: ONS, OBR, PwC analysis
The Consumer Prices Index (CPI) surged to a three decade high of 6.2% in February, more than four percentage points above the Bank of England’s 2% target inflation rate. Around half of the contribution to the headline inflation was driven by fuel, food and electricity prices. In the next few months, households and businesses will need to brace for further price increases, as the war in Ukraine adds to existing inflationary pressures.
Sources: ONS, PwC analysis