Tel. +44 (0)20 7287 4414
Tel. +44 (0)20 7287 4414
The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.
The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.

Bruges Group Blog

Spearheading the intellectual battle against the EU. And for new thinking in international affairs.

Warning: Economic headwinds ahead


The impact of loose monetary policy long after the financial crash reverberations had largely ended and repeated after the worst of the pandemic (creating the worst economic contraction for 300 years) had passed, is now taking its toll on inflation and interest rates.

February saw a rash of economic metrics that when consolidated alongside other recent outputs, point to a challenging 2022, when it would be best to keep your metaphorical seat belt on at all times.

Unemployment is at 4.1% with record vacancies. It would be churlish in the extreme not to acknowledge the resilience of the economy in this singular area, notwithstanding the £Bns expended on furlough.

GDP forecast

The bounce back in employment has been achieved against record Gross Domestic Product ("GDP") growth of 7.5% in 2021 (albeit after a record fall of 9.4% in 2020), the fastest in the G7. The latest Organisation for Economic Cooperation & Development ("OECD") forecast (December 2021) is for UK growth to slow to 4.9% in 2022.

Whilst this forecast would see the UK economy remain one of if not the fastest growing in the G7, given other pressures, all is not quite as rosy as it first appears, as growth is already below inflation, increasing the prospect of stagflation (where the economy grows less quickly than inflation) becoming baked in for months (if not longer) to come.


The Consumer Price Index ("CPI") is the government's preferred inflationary measurement. It is also the benchmark against which the Bank of England's Monetary Policy Committee ("MPC") is targeted with keeping inflation below 2%.

CPI inflation is now 5.5% (5.4% in January, the highest for 30 years) and set to exceed 7% in the coming months as the impact of (for example) higher energy bills comes through in April.

Retail Price Inflation ("RPI") is the legacy preferred government metric. RPI inflation is now 7.8% (7.5% in January).

Factory gate inflation is running appreciably higher in the manufacturing sectors of the economy but to remain competitive, manufacturers are, in the short term at least, absorbing some of the price rises themselves, at the expense of profit margin.

Given the relative resilience of Sterling, compared to the Euro (1.20) and the US Dollar (1.36), this margin reduction is exacerbated. For the doom mongers who predicted Sterling would collapse following Brexit, rumours of its demise appear to have been overstated.

Raw materials are also volatile in the Construction sector, albeit settling relative to 12 months ago. Steel, concrete, timber, bricks and concrete blocks have all gone through price increases at substantially above the levels of inflationary indices.

Petrol (average £1.51 per litre) and Diesel (average £1.53 per litre) prices are also at record levels. The increases have raised £5Bn of unbudgeted VAT revenue for HM Treasury alone.

With Fuel Duty around 57p per litre and VAT around 30p per litre, despite their slavish commitment to Net Zero CO2, the government take is over half the price of every litre and runs to almost £20Bn a year.

Perhaps it is time to start taxing cyclists for using public highways and mandating third party insurance and/or pivot away from banning internal combustion engines in new vehicles from 2030, to avoid this revenue stream slowly drying up.

To crown a gloomy outlook for inflation, given the government's zealous pursuit of Net Zero CO2, the prices of low mileage second hand cars has risen on average by 27%.

Electric cars remain largely the preserve of the Metropolitan Elite and those whose return journeys are typically under 20 miles (performance drops dramatically in winter).

House prices

House price inflation in 2021 was 10.8% according to data released this week by the Office for National Statistics ("ONS").

There are signs however that this particular bubble may be on the verge of deflating.

HM Treasury data, published on 17th February 2022, shows that between April and September 2021, just 6,535 mortgages have been completed using the Government's 95% mortgage guarantee scheme.

Of these, 84% were purchases by first-time buyers, and the government estimates that the total value of mortgages supported by the scheme is £1.2Bn.

Compared to total mortgage completions in each region, the scheme has supported a higher proportion of mortgages in the South East and Scotland, and a lower proportion in London, the North East and Northern Ireland.

House prices in England and Wales are predicted to fall in March and April based on deals already agreed between buyers and sellers, indicating that the post-lockdown property market boom may finally be running out of steam, according to analysis from Reallymoving.

Based on deals agreed between buyers and sellers in the run up to Christmas and over the new year period, house prices are expected to rise by 0.2% in February before falling by 0.9% in March and a further 0.8% in April.

Given the latest interest rate and wage inflation data (see below), this may accelerate as mortgage affordability declines.

Interest Rates

Interest rates are on the rise. After back to back increases resulting from the last 2 meetings of the Bank of England's MPC, base rates have moved from a historic low of 0.1% to 0.5%.

Further increases are inevitable given the latest inflation data allied with 4 of the 9 members of the committee wanting to increase rates more quickly last time around.

Expect several 0.25% increases in the coming months as the rate heads towards 2%. For those on variable rate and tracker mortgages, this will result in higher mortgage interest payments and fixed rate mortgage rates for new customers are beginning to increase sharply, particularly for longer fixed periods.

An increase in mortgage defaults and ultimately repossessions is inevitable.

Wage inflation

The gap between wage increases and inflation widened further with latest wage inflation data showing average increases of 3.4%.

By any comparison, this is below any of the major inflation indices, discounting the other issues raised above which are growing at above 10% per annum.

Expect the Trade Unions to be flexing their muscles, not least in the Public Sector, in the coming months.

National Debt

Having started the fiscal year at £2.223Trillion, this had grown to £2.318Trillion by November 2021 and is likely to be around £2.5Trillion by year end.

According to the Institute for Fiscal Studies, the annual interest on the National Debt is currently £69Bn (£1,000 per head of population). This equates to an interest payment of £5.75Bn per month.

As the government is likely to carrying on spending more than it receives through taxation for the foreseeable future, both the National Debt and the interest on it are likely to increase throughout 2022.

Inward investment (Foreign Direct Investment)

The only significant bright spot for the economy is inward investment, with the UK boasting strong support from (not least) the US and Japan, compared to the EU27.

In Financial Services, the anticipated migration of staff away from London following Brexit has not only failed to materialise but in many cases, lead to financial institutions increasing their office square footage and headcount.

We can only hope that the new Minister of State for Brexit Opportunities and Government Efficiency can begin to introduce meaningful deregulation to expand the Brexit dividend in the months ahead.

Without a radical shift in government policy around taxation, spending and money supply, we are in for a rollercoaster 2022 economically. 

Font size: +

Contact us

Director : Robert Oulds
Tel: 020 7287 4414
Chairman: Barry Legg
The Bruges Group
246 Linen Hall, 162-168 Regent Street
London W1B 5TB
United Kingdom
Founder President :
The Rt Hon. the Baroness Thatcher of Kesteven LG, OM, FRS 
Vice-President : The Rt Hon. the Lord Lamont of Lerwick,
Chairman: Barry Legg
Director : Robert Oulds MA, FRSA
Washington D.C. Representative : John O'Sullivan CBE
Founder Chairman : Lord Harris of High Cross
Head of Media: Jack Soames