What we predicted

  1. A return to more normal economic conditions in 2022 after the recovery phase of 2021. Consumer spending will underpin GDP growth in 2022 and could be an upside due to the large savings households have accumulated
  2. The jobs market will remain buoyant with unemployment at a historic low and job vacancies at an unseen high. The mismatch in skills between jobs and vacancies will create wage pressure in some sectors
  3. Strong household and business demand will collide with supply chain issues creating an additional push on prices. Inflationary claws could derail the recovery, but we see the inflation spike as transitory
  4. We believe 2022 will be the year in which the Bank of England raises rates - some form of normalisation will mean that emergency pandemic support is no longer necessary
  5. Long term interest rates have already risen from their pandemic lows, and we expect them to continue rising as the economy recovers

What's happened so far

  • A good start to 2022 deteriorated as the inflationary squeeze on real incomes weighed on consumer confidence and spending that hit growth momentum: first quarter GDP growth was 1.0% all of which came in January
  • Inflation is nudging up towards double digits with May’s UK CPI inflation at 9.1%. This is much higher than we anticipated although largely attributable to the unforeseen Russian invasion of Ukraine. Increased global supply chain disruption has and will continue to put further upward pressure on energy and food prices
  • A robust labour market continues with the April unemployment rate being 3.8% and 1.3 million job openings. The tight labour market is creating some upward pressure on wages
  • Monetary tightening is underway over fears of second-round effects from wage and price-setting. The Bank Rate has been increased in five consecutive MPC meetings and is now 1.25%
  • The 10-year gilt yield has risen by over 200bps since the beginning of 2022 and financial conditions are materially tighter than at the start of the year. The expectation of future short-term interest rate hikes will continue to push upward on long-term market interest rates

What happens next

  • CBRE expects a minor contraction in UK economic activity and move sideways some time over the next 18 months. This is a result of high inflation and rising interest rates, squeezed consumer incomes and reduced aggregate demand
  • Significant uncertainty persists around the future path of inflation. CBRE’s base case is that CPI inflation will peak at 10.8% in Q4 2022 and fall back to 2% in the second half of 2023. Implicit in this forecast is the end of the Ukraine conflict by year end with energy - and non-energy commodity prices falling from their current highs
  • We expect that the Bank of England will continue raising interest rates to combat inflationary pressure. The CBRE base case is that the Bank Rate will reach 2.3% by the end of the year. Long-term interest rates will also rise, likely peaking later this year with the potential for a modest fall back in 2023