Omicron briefly stalls economic recovery as attention turns to high inflation and weak trade

The Omicron wave caused the economy shrink by 0.2 per cent in December, still confirming the strongest annual, peace-time GDP growth (of 7.5 per cent) the UK in almost a century, as the UK now faces up the challenges of high inflation and weak trade, the Resolution Foundation said today (Friday) in response to the latest ONS GDP and trade data.

A smaller than expected GDP fall in December means that the UK remains at pre-pandemic levels (measured on a monthly basis). And with all Covid restrictions due to end in a few weeks’ time, the recovery in 2022 should be far less bumpy than it was in 2021.

Trade levels however remain 10 per cent down on pre-pandemic levels, despite healthy growth of 1.3 per cent in December, highlighting the impact of Brexit, as well as Covid, on parts of the economy.

Data for the first 12 months of the UK-EU Trade and Co-operation Act shows that new trade barriers with the EU have slowed the recovery of goods trade with the EU, which fell by 1.2 per cent in 2021 even as trade with countries outside the EU experienced double-digit growth.

The Foundation notes that while the UK experienced the fastest growth of any G7 economy last year (in large part due to experiencing the biggest recession in 2020), on trade the UK continues to lag competitors such as the US and Germany, where trade has already surpassed pre-pandemic levels.

Today’s data confirms that Britain has both an immediate economic challenge – addressing high inflation, and the cost of living crisis it has prompted – as well as the longer-term challenge of fostering stronger growth as part of a new economic strategy for the 2020s, says the Foundation.

James Smith, Research Director at the Resolution Foundation, said:

“The Omicron wave has only briefly stalled the UK’s strong economic recovery, which should be more stable from here on in, allowing policy makers to focus on the more urgent cost of living crisis that Britain is experiencing.

“But while the economy is at pre-pandemic levels, UK trade continues to lag many of its main competitors. While Covid has undoubtedly damaged trade, so too has the introduction of fresh trade barriers with the EU.

“As well as facing up to the cost of living challenge, the Government also needs to redouble efforts to boost trade as part of a new economic strategy for the 2020s.”