(Bloomberg) -- The U.K. economy will grow at half of last year's pace in 2022 as soaring inflation, higher taxes and the war in Ukraine weigh on the recovery, according to the latest forecasts from a leading business group.
The British Chambers of Commerce downgraded its forecast for gross domestic product, anticipating an expansion of 3.6%, down from 7.5% in 2021. Last year's boom was the biggest since 1941, reflecting businesses reopening after the pandemic.
Inflation is expected to peak at 8%, according to the BCC, the highest levels since 1991, after the regulated cap on household energy bills increases in April. High prices will take a heavy toll on the recovery and hit consumer spending, with wages failing to keep up with prices.
The result will be the the deepest living standards squeeze in at least 30 years. The Bank of England last month forecast inflation to peak at 7.25%.
The BCC expects rates to rise from 0.5% to 1% this year, lower than market expectations, but “with the current inflationary spike mostly driven by global factors, higher interest rates are expected to do little to curb further increases in inflation.”
Business investment will suffer as companies respond to “rising cost pressures, higher taxes and weakening confidence amid deteriorating U.K. and global outlooks,” the BCC said.
The group, which represents thousands of businesses of all sizes across a network of 53 regional chambers of commerce, expects consumer price inflation to peak at 8% after the regulated cap on household energy bills increase in April. The Bank of England last month forecast inflation to peak at 7.25%.
A controversial 12 billion pound ($16 billion) payroll tax also comes into force in April. Employers will pay almost half the total, with the rest falling on workers.
“Our latest forecast signals a significant deterioration in the U.K.'s economic outlook,” said Suren Thiru, head of economics at the BCC. “The economy is forecast to run out of steam in the coming months as the suffocating effect of rising inflation, supply chain disruption and higher taxes weaken key drivers of output, including consumer spending and business investment.”
He said that Russia's invasion of Ukraine is like to weigh on activity “by exacerbating the current inflationary squeeze” and increasing bottlenecks in global supply chains.
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