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London’s Economy Today – April 2022 editorial

The cost of living continues to rise

Increases in the cost of living intensified this month. The Ofgem price cap for standard energy bills increased by 50% and a higher rate of National Insurance Contributions (NICs) came into effect. Rising costs will have an impact on household budgets, particularly at the bottom of the income distribution.

Even before April’s new pressures on household finances, inflation in March had hit a new 30-year high. CPI inflation in March was 7% year-on-year, the highest since a figure of 7.1% in March 1992, with prices rising 1.1% in the month of March alone. Once again, the figure exceeded consensus expectations and there was clear evidence of how widespread inflationary pressures have become. The largest headline contributions to annual inflation remained vehicle fuel costs, electricity and car prices. However, the breakdown of monthly inflation by category showed restaurant and hotel prices, clothing, and furniture and household equipment exerting upward pressure on CPI. Estimates by the National Institute of Economic and Social Research (NIESR) also suggest that London is seeing faster inflation than in the rest of the country. Their figure for London’s underlying inflation rate in March was 0.8 percentage points above the UK average and the highest of any region.

The Office for National Statistics (ONS) have also provided insights into households’ experiences of the cost of living from the Opinions and Lifestyle Survey. In March, even before the Ofgem price cap increase, nearly a quarter of UK adults found it difficult or very difficult to pay usual household bills in the last month compared with a year ago. Perhaps unsurprisingly, that share is higher in areas facing higher deprivation, though the breakdown is only available for England. The share of adults struggling to pay usual bills rises to over one in three households in the most deprived areas of England (Figure 1). Around 1 in 10 (13%) adults in the most deprived areas also reported that they were behind on payments for gas or electricity bills. Wider housing costs were also a problem, with around 3 in 10 adults paying a mortgage or rent reporting that it was very or somewhat difficult to pay their housing costs. And households may be less able to absorb these growing costs going forward, with 43% of adults reporting they would not be able to save money in the next 12 months. This is the highest percentage since the question was first asked in March 2020.

Figure 1:

Economic growth weakened in February

Another concerning sign for the economy came this month with the release of February’s GDP data. While activity still picked up across the month, it rose just 0.1% after the surprisingly strong 0.8% increase in January. The February reading was below consensus expectations, and while a big part of the downside surprise came from health spending, several sectors were weak. The sharp drop of nearly 4% in health spending came as the pace of vaccinations and testing eased and other COVID-19-related activities wound down. However, the Construction, Manufacturing, Real estate and Retail sectors all saw declines in activity. Some sectors did see strong growth, however, with Accommodation and food services finally recovering to pre-pandemic levels of activity with an 8.6% surge in output.

Alongside weak Retail sector GDP in February, other indicators also point to the rising cost of living prompting consumers to cut their spending plans. UK consumer confidence in April hit -38, its lowest point since the record trough in July 2008. This makes April 2022 the second-worst reading since the series began in 1974. The most recent hard data showed March retail sales volumes falling 1.4%, with non-store sales making up the bulk of the drop. On aggregate, London may initially be insulated from the largest impact, as consumer confidence was at a comparatively modest negative reading of -12 in April, while Mastercard retail data suggested that London shop sales may have outperformed figures from the wider UK in recent months. However, London’s sharp inequality and high levels of poverty after housing costs mean that consumer resilience is likely to be very unevenly spread across the capital. Already, the Mastercard data show real spending in shops is strikingly varied by area (Figure 2).

Figure 2: Retail card spending real growth from December 2021 to
March 2022

Map showing retail card spending real growth from December 2021 to March 2022

In the coming year, the already-stuttering recovery is likely to face a growing range of headwinds. The International Monetary Fund (IMF) has downgraded its forecast for the UK with the economy expected to grow by 3.7% this year (down 1 percentage point (pp) on its January forecast) and by 1.2% next year (a 1.1pp downgrade). The IMF observed that “consumption is projected to be weaker than expected as inflation erodes real disposable income, while tighter financial conditions are expected to cool investment”.

War in Ukraine expected to negatively impact global growth

The IMF published its first World Economic Outlook forecast since the start of the war in Ukraine. It notes that “global growth is expected to slow significantly in 2022, largely as a consequence of the war”, while inflation is expected to increase further. Global growth is expected to slow from 6.1% in 2021 to 3.6% both this year and next. This is a downgrade on the 2022 growth forecast of 0.8pp and a downgrade of 0.2pp on 2023 compared to what it was forecasting in January. The IMF further noted that “financial stability risks have risen along many dimensions, although no global systemic event affecting financial institutions or markets has materialized so far”. The World Bank has also recently downgraded its global growth forecast this year to 3.2% (down 0.9pp) due to the impact of the war. The war is expected to disrupt global trade growth with the World Trade Organisation (WTO) cutting its forecasted growth in world goods trade this year by a third to 3%. It however also warned that a protracted war and embargo of Russia could cut growth to 0.5%. And it further warned that food prices could jump by 37%.

Beyond the war, the World Bank notes that lockdowns in Chinese cities to stop the spread of COVID-19 are also disrupting seaborne trade. Data shows that despite growing more strongly than expected in the first quarter, China’s economy has recently been negatively affected by these lockdowns with retail sales contracting in March, the first time this has happened since July 2020. In response, the People’s Bank of China has introduced a number of supportive measures to encourage financial institutions to support the property sector and local government investment projects.

Mixed signals on London office space

The estate agents Savills released data this month which indicates that the demand for office space in the Square Mile has rebounded strongly in recent months, with transactions equalling £3.3bn in the past three months. Stephen Down, head of Central London investment at Savills, said that this showed a return to more normal trading conditions but did warn that “the increased cost of finance and macro-political uncertainty is having a greater impact on buyer decisions in London just as it is around the globe”. However, Deloitte has announced it will be further downsizing its office space in London with it leaving its New Street Square campus.

Looking at London’s international retail attractiveness, April saw research by Unidays rating Covent Garden as the most popular shopping street in Europe, ahead of the Champs-Élysées in Paris. Oxford Street was rated third in the ranking with Regent Street sixth. Thus, although the capital continues to face challenges such as rising inflation, which is depressing consumer confidence, it retains a number of advantages. GLA Economics will continue to monitor these challenges and opportunities over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.