since the start of the conflict, I would estimate that it has added about 1% to inflation versus our pre-conflict baseline. All other things being equal, that will mean another 1% hit to real incomes. Then, the pass-through to the size of the economy depends on what the Government do to take steps to mitigate that effect. If they don’t do anything, it could shave about 0.25% to 0.5% off GDP, compared with where we were before. That is not to say that the economy is going to shrink; it just won’t grow by as much as we had anticipated.
Clearly, if it escalates to the extent that we include energy within sanctions, those effects will get much bigger. As a broad rule of thumb, I would perhaps double the size of the hit to the economy and the increase in inflation.[1]
- We asked Professor Jagjit Chadha, Director at the National Institute of Economic and Social Research, about the scale of the impact on the UK economy and the likelihood of an oil price shock similar to 1973, which saw the UK face high inflation and interest rates. He replied that while inflation was likely to peak at 7 to 8 per cent or higher this year, it was too early to tell whether it will reach the levels of the 1970s. He explained that there were a number of shocks in the 1970s, including oil and commodity prices as well as “the loss of the monetary anchor”. However, he noted there is now “an inflation target pursued by the independent Bank of England, which is one thing we didn’t have in the 1970s.”[2] On the outlook for growth of the UK economy, Professor Chadha added that “growth will be slower—somewhere in the region of 1% down this year and 0.5% lower next year on current forecasts.”[3]
- Regarding the long-term impact for UK businesses operating in Russia, given the
threat by the Russian President to seize the assets of international companies exiting
Russia, Mr Tony Danker, Director-General at the Confederation of British Industry, said:
Obviously, I think that closes Russia as a market to us for a considerably longer time than anyone would have imagined. That is the implication. For Britain, which does not export or import in massive amounts to Russia, it is not a devastating hit, but it is a closed market for the medium to long term. That is the implication.[4]
- The potential impact of sanctions has added to concerns about the cost of living. In a recent report on living standards, the Resolution Foundation concluded that “High inflation will make falling real household incomes the defining economic feature of 2022.” The report identified “the wholesale prices of gas and oil, which increased rapidly following the re-opening of the global economy, and have increased sharply again since Russia invaded Ukraine” as the main drivers of high and rising inflation.[5] Tony Danker,
