The economy rebounded from pandemic restrictions in 2021, and businesses witnessed a robust return of consumer demand. But with supply chain disruptions lingering, as well as the spectre of higher interest rates and inflation, what does the rest of 2022 have in store for businesses in the retail and leisure sector?

• The UK economy is expected to grow by 5.2% in 2022, which represents a healthy rebound from the exceptional decline in 2020.
• Inflation is above its target and there is a squeeze on consumer spending power.
• The Bank of England (BoE) may raise the base rate to 1% by the end of 2022.
• The labour market is robust, with unemployment rates remaining low.
• Uncertain and pricy supply chains may mean businesses build up inventory.

• The UK economy achieved an impressive recovery in mid-2021 as Covid-19 restrictions were lifted. This allowed consumer spending to gain traction.
• However, conditions became more challenging heading into autumn as Covid-19 fiscal support began to unwind. Macro-economic headwinds gained force as tighter labour markets, supply chain disruption and a sharp rise in inflation dampened prospects for growth.
• In February 2022, the Bank of England (BoE) deemed it necessary to raise interest rates for the second time in three months, from 0.25% to 0.5%.
• Despite these challenges, the UK economy is forecast to reach pre-pandemic levels in the early part of 2022, in line with its European neighbours.
• The recovery is expected to be uneven across sectors and regionally.

David Scott, our Head of Retail and Leisure, says: “These have been incredibly testing times for retail and leisure, but together we have delivered some truly amazing outcomes. I believe we can, collectively, make the most of the available opportunities.”

1. A squeeze on spending power

• A rise in national insurance contributions (NICs), a freeze on the personal tax allowance and increasing inflation will see a decline in spending power.
• The NICs increase of 1.25 percentage points and the energy price cap rise will both hit in April, causing a significant squeeze on incomes.
• Consumer Prices Index (CPI) inflation reached a 30-year high of 5.4% in January 2022, with the BoE suggesting it could rise to more than 7% by spring 2022. The proportion of households struggling with finances has increased.

2. Interest rate rises

• Interest rates rose from 0.25% to 0.5% in the first quarter of 2022. This was the second rate rise in three months and marks the first successive increase in more than three years.
• Rising rates could have a more muted impact, given that the report states that the share of households with mortgages has fallen (30% in 2019/20 versus 39% in 2007) and significant growth in the proportion of fixed-rates mortgages (80% in 2021 versus 51% in 2007).
• The psychological effect of rising interest rates could have a greater impact on spending. Households could interpret this as a sign of higher interest rates to come, or as a precursor to economic slowdown.
• Interest rates are expected to rise gradually to reduce any adverse impact on the economy but could reach 1% by the end of 2022.

3. Covid-19

• The emergence of the new Covid-19 variant, Omicron, sent shockwaves throughout financial markets, triggering a new wave of lockdown measures across the EU.
• The ongoing impact of the pandemic continues the run of uncertainty for businesses and economies, which undermines investment and damages consumer confidence.
• The rapid vaccination programme appears to have limited the rise in hospitalisations compared with previous waves, with businesses, households and government now more adept at adapting their operations.

4. Supply chain disruption

• Ongoing constraints across global supply chains are likely to persist well into 2022, with rising shipping and container costs placing further pressure on margins.
• In response to patchy availability, businesses may over-order and/or build up inventory, shifting their reliance away from ‘just-in-time’ supply models.
• For certain industries, labour shortages will take longer to resolve and will be compounded by the impact of Brexit.

• For many households, 2022 is likely to be a ‘pinch point’ as household incomes face being eroded by a combination of tax hikes and a rise in the cost of living.
• Rising inflation is the biggest concern for consumers in 2022 – more so than Covid-19 and a weaker economy. The BoE suggests inflation will hit more than 7% by spring 2022, after which it will start to come down.
• The spiralling cost of energy is a key contributor to inflation, with the average household expected to face an additional £600 on their bills as the energy cap is raised.
• Coupled with the rise in NICs of 1.25 percentage points, expectations about personal finances look challenging.
• The proportion of households reporting financial difficulties is rising, particularly for those with unsecured loans, who typically have lower incomes and are less likely to be employed.