New year worries

Investment boost ‘will combat growing pressures’

Businesses see costs rising

Economists say government stimulus measures to encourage business investment will be key to combat the threats posed by the Omicron variant of Covid-19 and continuing cost and supply pressures.

The CBI has reduced its growth forecast from 8.2% this year to 6.9% and in 2022 from 6.1% to 5.1%.

It says short-term headwinds – including rising costs and shortages – have grown since the business group’s previous forecast in June. Longer-term challenges, notably persistently poor productivity, underline the need to boost business investment.

Another survey from KPMG is more pessimistic, predicting growth could more than halve next year if new restrictions are imposed to deal with the Omicron variant.

Tony Danker, CBI director-general, said: “The UK’s New Year resolution must be to give firms the confidence to go for growth. We should be raising our sights on the economy’s potential and seizing the moment.

“Government has key levers at its disposal to back business: pro-investment and pro-innovation regulation to help build new markets, a competitive tax regime that incentivises business investment across the board and new market-making interventions, for example on clean energy.

“Getting this mix right will pay dividends over the longer term, jumpstarting the UK’s flatlining productivity and set us on course for a brighter new year.”

KPMG said the potential disruption to the Christmas trading season from the new variant could be a huge blow to recovery hopes for hospitality and travel businesses, but the impact will depend on the extent to which new social distancing restrictions are introduced.

It predicts GDP growth could hit 4.2%, but also said that figure could fall to just 1.8% if tough measures are needed to control the variant.

However, the uncertainties could see the Bank of England hold off raising interest rates this month.

Yael Selfin, chief economist at KPMG UK, said the Omicron variant has “elevated the level of uncertainty” about the recovery path from the pandemic.

“While the impact is not expected to be as severe as at the start of the pandemic, or even the beginning of this year, increased uncertainty and the potential reintroduction of social distancing measures could see output fall this month and during the first quarter of 2022,” she said.

Assuming that no further restrictions are introduced as part of measures to tackle the spread of the Omicron variant, the report said unemployment “might rise only gently”.

Jon Holt, chief executive of KPMG UK, said: “Long term economic growth remains reliant on the UK’s ability to increase productivity, decrease uncertainty and give businesses the confidence they need to invest. We need to create the conditions to accelerate companies’ investment in technology and power the UK’s recovery.

“While companies have been grappling with global supply chain problems for some months, we expect these to ease gradually as increased capacity comes on board. Nevertheless, growth momentum could stall if businesses find it harder to recruit more staff and a more sustained pick-up in UK GDP growth would require productivity to rise.”

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