John Campbell

Columnist

John Campbell

Economics & Business Editor, BBC Northern Ireland

Inflation Looms

BBC NI’s Economic & Business Editor, John Campbell, discusses what economic hurdles may lie ahead for 2022.

In the lean months of January and February the balmy days of summer feel a long way off. For some businesses that feeling is more intense this year: what was a summer boom has been replaced with more pandemic uncertainty and eye-watering energy bills.

The official figures from the NI Statistics and Research Agency (Nisra) show that in the period from July to September a recovery was in full swing. Output in the dominant services sector was up almost 6% on the year and 3% on the quarter. That growth meant that services sector finally recovered the output lost during the property crash recession almost 15 years ago. The strong performance came in a period when COVID restrictions had been lifted and the sun was shining.

At that time some restrictions were still in place in the Republic and tourists streamed north – a stroll round Belfast city centre made it obvious that retail and hospitality were doing well as a result. However it was finance and business services which may have been having the best time.

Output was up by 4% on the quarter and 17% on the year – this was most probably a story about pent up demand in the housing market which meant a busy time for solicitors, estate agents and mortgage lenders.

With the vaccine roll out going well and a soft landing for the furlough scheme there was real optimism in the early autumn. But for the hospitality sector, and to a lesser degree retail, the Omicron wave made for a very difficult end to the year.

Across the UK hospitality businesses feel badly short-changed: the public health message discouraged people from going out while the financial support was limited. At the time of writing the broader economic impact of Omicron is unclear but hopefully it can be contained, as the last year has demonstrated that businesses have become better at living with the virus. But aside from – and in some cases linked to – the pandemic, there are other looming challenges in 2022 which are mostly about inflation.

At the start of the new tax year on 1 April a slew of measures will take effect.

The VAT rate for hospitality and accommodation is set to return to the standard 20% rate. National Insurance rates will rise by 1.25 percentage points for both employees and employers. Employers will also have to fund minimum wage increases of between 4.1% and 9.8%. However it is energy price inflation which will be the big story for at least the first half of 2022.

The Resolution Foundation think tank, which focuses on the living standards of people on low-to-middle incomes, has concluded that energy costs will drive ‘a broad-based cost of living catastrophe affecting the vast majority of households’ in the UK.

There have been a series of announced price rises in gas and electricity, the latest of which took effect on 1 January.

Unfortunately there are probably more to come as wholesale

“There have been a series of announced price rises in gas and electricity, the latest of which took effect on 1 January. Unfortunately there are probably more to come as wholesale prices continue to touch record highs.”

prices continue to touch record highs. The Department for Communities has announced an emergency payments scheme for those households “severely impacted” but it is modest in its scope with a budget of just £2m. It’s not yet clear whether Stormont or the UK government is planning a bigger intervention to help consumers and businesses.

Across the economy as a whole the Bank of England expects inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April. That is all based on the assumptions that energy prices stop rising, global demand rebalances from goods to services and supply disruptions ease.

There is obviously lots of uncertainty about the accuracy and timing of those assumptions. As the Bank itself said in its most recent monetary policy report, “a potential worsening of global supply chain disruption could also push up on inflationary pressures.

“For example, China’s current zero-COVID strategy could lead to renewed disruptions at Chinese factories and ports, and could affect shipping costs”.

The Bank’s dilemma in this situation is that it does not want to be seen to do nothing in the face of rising inflation but that putting up interest rates is not going to do anything to speed up operations at Guangzhou’s container terminals.

Supply chain inflation is also a feature of the Northern Ireland Protocol. However you view the protocol politically, it is an undeniable fact that it makes it more expensive to move goods from Britain to Northern Ireland. Those costs will eventually show up somewhere, whether as increased prices or reduced profits.

Some commercial mitigation has been possible by sourcing products locally or from the EU, but hopefully a more comprehensive political mitigation can be agreed this year.

Just before Christmas the EU published its latest plan to guarantee the supply of medicines from GB to NI. My initial reading of that plan is that it takes on board industry concerns about an earlier proposal, for example removing the need for NI-specific packaging and leaflets.

The UK government has not yet given its verdict on this proposal and progress has been much more limited in other areas, particularly on the regulations for food products.

Many in business, particularly manufacturing, will be hoping that a comprehensive deal can be reached on streamlining the protocol. But time is short and the politics remain extremely volatile.