The UK economy is recovering from the impact of the Omicron variant, next week’s numbers will show. The ONS will say on Friday that real GDP rose in January after December’s fall, and is close to its pre-pandemic level: construction and services activity are likely to be around or above those levels, but manufacturing below them.
This does not, however, mean the economy is fully healed. Output is still well below the level it would be at if the pre-pandemic growth rate had continued. And the pandemic has shaken up the patterns of supply and demand, causing mismatches that are contributing to inflation.
Germany is also recovering from Omicron: next week’s numbers should show that industrial production rose in January. This would, however, leave output more than 6 per cent below its pre-pandemic level, and 12 per cent down from its 2018 peak. The pandemic has distracted us from the fact that Germany, and the eurozone generally, were doing badly before Covid-19 struck.
We’ll see the ECB’s response to rising inflation on Thursday. Although it will continue to reduce its quantitative easing, it is likely to suggest that interest rates won’t rise for a while. Although the war in the Ukraine will add to inflation – via higher gas and oil prices – it is also adding to uncertainty which, alongside the fall in real incomes caused by higher oil prices, will depress economic activity.
War isn’t the only threat to the global economy, though. The People’s Bank of China is likely to report that its M1 measure of the money stock is growing only slowly, which is a lead indicator of weak activity in the country. That means weak exports from the west, but it also should cap demand for commodities and hence their prices.
Back in the UK, meanwhile, the Halifax could report a cooling off in the housing market, with monthly increases now being much less than they were late last year. Most economists expect a cooling off, thanks to rising mortgage rates and a lack of affordability.
Watch out too for Friday’s trade figures. The notable thing here will be that trade volumes have fallen markedly: both export and imports are some 10 per cent below 2019’s levels, meaning that the share of international trade in GDP has fallen. This is troubling. The division of labour is a major cause of productivity, so less international specialisation is yet another reason to worry about trend productivity growth, and hence the UK’s long-run growth potential.
