Economists expect UK living standards to deteriorate in 2022 as inflation and rising taxes hit poorer households, while supply-chain blockages and Brexit-related trade underperformance will limit economic growth.
The Financial Times’s annual survey of nearly 100 economists revealed that most expect inflation to outpace wages, while Covid-19 will continue to disrupt production and consumption. At the same time, high energy costs and the increase in National Insurance contributions will hit those on lower incomes hardest.
A majority of respondents also said that the UK’s recovery would lag behind that of comparable economies, with many of them blaming this underperformance on political instability and a lack of any credible long-term economic strategy.
Although many countries are experiencing high inflation, supply-chain disruptions and labour shortages, Brexit would make these problems more severe in the UK, economists said, potentially prompting the Bank of England to raise interest rates more rapidly than other central banks.
Some did see grounds for optimism, noting in particular that the pandemic had sparked a new wave of investment in technology and digitalisation, which could strengthen next year, because of generous tax support. However, several respondents said the benefits could flow into corporate profits rather than into higher wages.
Many also doubted that those gains would be accompanied by the policies necessary to boost productivity in the longer term, such as investment in skills, training and pro-investment regulation.
Here are the full responses to questions about the economic outlook for 2022.
Will the UK economy outpace or lag behind other developed economies in 2022 and why?
Melanie Baker, senior economist at Royal London Asset Management: UK growth is likely to lag the US, partly given a different outlook for fiscal policy if President Biden’s Build Back Better bill passes. Labour shortages seem likely to hold back growth in both economies though. Omicron looks set to weigh significantly on the UK economy into Q1, though Omicron will likely become an issue for more economies in the coming weeks given its apparent high transmissibility.
Kate Barker, trustee at British Coal pension scheme: May outpace EU (faster recovery from Omicron impact) but lag the US due to the US fiscal stimulus.
Nicholas Barr, professor of Public Economics, LSE: More likely to lag behind. My surmise is that the UK will be in the middle of the pack in terms of response to the pandemic, but with the added handicap of Brexit, which is mainly a UK affliction, albeit with knock-on consequences for the remaining EU member states.
Ray Barrell, professor of Economics and Finance, Brunel University London: The negative structural effects of Brexit are still working through the UK economy, and this is the main reason why UK growth will lag behind other advanced economies in 2022. The OBR suggest that over the medium term the self-harm inflicted by the exit from the EU will reduce productivity by 4 per cent, and we may expect this to reduce growth by around 0.5 per cent in 2022. The UK workforce is likely to grow less rapidly than in the past because inward migration will be much lower. Many of the southern and eastern European migrants are likely to move to the advanced economies of north and west Europe rather than the UK. Northern and western European growth will be enhanced by migration diversion, the UK growth disadvantaged, perhaps by 0.2 per cent. Poor design of policies toward Covid-19 will not help raise UK growth, nor will the relatively low rates of vaccination in the UK as compared to northern and western European countries, but the effects are hard to quantify.
Martin Beck, chief economic adviser, EY ITEM Club: The UK should outpace at least the average of developed economies in 2022. While the scope for catch-up growth has diminished, that UK GDP still has more lost ground to make up relative to the pre-Covid-19 position than many of its peers should help. And while headwinds to growth in the short-term aren’t lacking, that the financial position of households is as strong as its ever been, combined with a healthy jobs market, should fuel the traditional appetite of UK consumers to spend. That the UK appears to be taking a more ‘learn to live with’ approach to Covid-19 than other countries should also mean a more cautious attitude towards economically destructive social distancing measures or lockdowns.
David Bell, professor of Economics, University of Stirling: It will continue to lag other developed economies due to a combination of the more adverse effect that the pandemic has had on UK economic activity and Brexit-induced trade frictions.
Philip Booth, professor of Economics, Vinson Centre, University of Buckingham: It will more or less keep pace. There is nothing about UK economic policy that marks it out from other countries in terms of its ability to increase productivity.
Nick Bosanquet, professor of Health Policy Imperial College: Strong performance 2020-1 as a result of government support, vaccine programme and ready adaptation by the economy to Covid-19 conditions. The special factors will not apply going forward. The UK will be around the average. Plus factor that the UK small business/service economy working well: minus is that supply delays/trade shifts as a result of Brexit will be negative.
Erik Britton, managing director, Fathom Consulting: The UK will probably lag behind the US and broadly keep pace with the EU. The US is unlikely to impose any further nationwide restrictions as a result of Covid-19, while that might happen in the UK and EU. And the damage to the level of GDP in the UK wrought by Brexit has largely already been done, so we’ll keep pace with the EU from a slightly lower level
Jagjit Chadha, director, NIESR: The UK economy does not look well placed to lead the advanced country pack in 2022. A combination of a ragged edge over Brexit and political uncertainty will continue to hamper what might otherwise have been a stronger recovery. Specifically trade, investment and FDI will are unlikely to recover strongly and the skills gap in the labour market simply cannot easily be addressed very easily in the coming year alone.
Victoria Clarke, UK chief economist, Banco Santander: After a year in which the UK performed more strongly than its G7 peers, we expect the UK to put in a middling performance in 2022. In the UK’s favour will be the strong starting point for the labour market, including solid recent increases in employment, and further gains ahead. But we expect high UK inflation over the first half of 2022 and only a slow moderation thereafter, crimping household spending power and consumption as the year begins. The Omicron variant reminds us that Covid-19is likely to be with us for a while longer, but UK activity should be impacted relatively less than some of its peers, amid the government’s ‘living with Covid-19’ strategy.
David Cobham, professor of economics, Heriot, Watt University: Poor Covid-19 management (late decision-making, lack of support for business and workers) plus Brexit suggest the UK will lag.
Brian Coulton, chief economist, Fitch Ratings: In growth terms, the UK will outperform a bit but this largely reflects the lagging GDP recovery to date. UK GDP will only recover its pre-pandemic Q4 2019 level by Q2 2022, 6 months later than the eurozone and a year after the US. This leaves more scope for catching up in 2022.
Diane Coyle, Bennett professor of Public Policy, University of Cambridge: Old problems — low investment, low levels of private R&D, inadequate infrastructure, the dysfunctional housing market, policy instability — and new problems — Brexit headwinds, political uncertainty, loss of skilled migrant labour — mean the UK will lag other comparable economies.
Bronwyn Curtis, non executive director, UK Office of Budget Responsibility: It will lag the US, but do a bit better than the eurozone. Japan will lag the rest of the developed economies. The current macro environment is extraordinarily stimulative in the US. The fiscal outlays alone are comparable as a percentage of GDP to the outlays for WW2. Added to that is the fact that the real fed funds rate in Q3 21 was -4 per cent. And there has been QE as well. Household balance sheets and company capex will both be stronger than the UK. The US looks set to withdraw the stimulus more slowly than the UK.
Paul Dales, chief UK economist, Capital Economics: Don’t be fooled by the UK’s GDP growth figures, which will make it look as though the UK is soaring ahead (our GDP forecasts for the UK for 2022 and 2023 are 4.8 per cent and 3.5 per cent compared to 3.0 per cent and 2.0 per cent for the US and 3.5 per cent and 1.5 per cent for the euro-zone). The UK’s decent growth figures are mostly a statistical mirage generated by the pandemic.
In terms of the level of GDP, the UK will continue to lag behind the US and the eurozone for most of 2022 for three reasons. First, the UK is having a bad experience with Omicron, which will suppress activity by more. Second, its product and job shortages seem to be having a bigger drag on activity than elsewhere. Third, the hikes in taxes in April 2022 will be another drag.
That said, once the worst of Omicron and the shortages pass, the UK’s GDP will probably start catching up with GDP in the US and the eurozone. So the UK’s behind, but it’s not down and out.
Richard Davies, director, Economics Observatory: We may see some short-term outperformance, due to strong vaccine take up. With Omicron fast on the rise, H1 of the year looks likely to be held back by lockdowns. The UK’s vaccination drive (including boosters) is better than most advanced-country peers and so in the terms of Covid-19-shock type effects, we should outperform.
Longer-run I expect the UK to be a mid-tier performer (compared to G7 and OECD peers) because this is what our long-term productivity performance justifies. The UK has had a turbulent 10-15 years and the sooner we move from emergencies of one type or another — finance, Brexit, Covid-19 — and back to traditional concerns — industrial strategy, productivity — as the primary focus of our economic debate the better.
Howard Davies, chair, NatWest: The Brexit drag effect will be felt, so the UK is likely to grow less rapidly than the US and the core of the eurozone.
Melissa Davis, director, Economics Observatory: Consensus growth expectations for the UK versus the rest of Europe are a little high, so the economy is set up to fail in that sense. The combination of a sharp fiscal tightening, Brexit hangovers and squeezed real incomes suggest growth will undershoot expectations of 4-5 per cent and come in more at 2-2.5 per cent, but this could still be better than the eurozone and around in-line with the US. Indeed, it is not all doom and gloom. If inflation decelerates sharply as we expect and Omicron is a mild and swift route to higher levels of herd immunity, the Services sector could bounce back nicely from the Spring, while Manufacturing will benefit from easing supply-chain pressures and restocking.
Paul De Grauwe, professor, London School of Economics: I believe the UK economy will lag behind other developed economies in 2022 mainly as a result of the collateral damage that Brexit will continue to impose on the UK economy. Recoveries are driven by optimism about the future. That optimism drives investment. Brexit will impose chronic pessimism about the future of the UK economy.
Panicos Demetriades, emeritus professor of economics & former governor of the Central Bank of Cyprus, University of Leicester: Although the economy is now recovering from the pandemic, there is still considerable uncertainty whether the bounce back will continue unabated or whether new restrictions will be required to contain the spread of the Omicron variant.
However, by itself, the Omicron variant cannot cause any major disparities with other developed economies. What will hold back the UK relative to other developed countries is the real cost of Brexit in the form of increased border costs, labour shortages and their impact on output and trade.
There is also the possibility that the UK’s monetary policy may need to become tighter earlier than in other developed countries, as inflation pressures are likely to be more pronounced in the UK due to the impact of Brexit on labour shortages, trade costs and, more broadly, the supply chain. and we are already seeing early evidence on that with the Bank of England being the first central bank to raise rates.
In 2021, the pandemic helped to disguise and compound the impact of Brexit on trade and labour shortages, however, assuming that Omicron’s impact is shortlived, the adverse effects of Brexit will become clearer.
As the effects of Brexit become clearer more questions will be raised about the current Tory government’s policies, in addition to current corruption scandals and Boris’ arbitrary, if not chaotic, style of government.
It is quite likely that in 2022, the UK will enter a new period of political instability, with Tory leadership challenges, parliamentary elections and Lib Dems reopening the debate on Brexit.
Political instability could add to the uncertainty already faced by the private sector, hampering new investment and productivity as the private sector exercises the option of “wait and see”.
Wouter Den Haan, professor, London School of Economics: The UK economy will lag behind because its supply chain problems and difficulties in filling vacancies will be larger.
Swati Dhingra, Associate professor, London School of Economics: UK’s got the added impact of Brexit over and above the global trends. So lag behind.
Charles Dumas, UK team, TS Lombard: The UK economy likely will outpace economies elsewhere in the developed economies space in 2022. Admittedly, Omicron presents a threat, with high frequency data suggesting in-person services are already under pressure. Granted, double-jab vaccinations rates are at the lower end of the European scale, but it’s not a wide range (double-jab rates are well above the US), and the UK booster campaign is racing ahead.
Beyond the Covid-19 scare, the Bank of England is normalising because the recovery continues, albeit very unevenly. The main threat to growth globally is that the unwinding of the Covid-19-induced consumer durables boom will swamp the recovery of the underlying cycle. In short, Covid-19 generated a “Zoom Boom”, as people and businesses spent to furnish a world that didn’t exist before. That job is now broadly done, and replacement demand will be modest for some time. The UK, with its services economy, is among the least exposed developed economies to this growth scare. Similarly, the UK is less exposed to the sharp slowdown under way in China, at least in the real economy.
At the same time, the UK went down faster in the Covid-19 recession, so the rebound to the new normal is more vigorous.
Finally, the stimulus overhang in the UK remains one of the largest in the world, at least providing some cushion as monetary and fiscal policy normalise.
Wohlmann Evan, vice-president — senior credit officer, Sovereign Risk Group Moody’s Investors Service: The UK economy will be among the last of the developed economies to recover its pre-pandemic output given the still-significant impact of the pandemic on the UK’s services reliant economy, particularly if the new Omicron variant necessitates further restrictions, as well as headwinds to private investment and exports from ongoing Brexit-related uncertainty. While most supply-side disruptions are expected to be temporary, these supply bottlenecks have been compounded by labour shortages, reflecting both the pandemic and tighter immigration rules since Brexit, with the relationship between supply disruptions, labour shortages and Brexit particularly evident in those sectors such as hospitality and transport. High inflation, high energy bills and planned tax rises will erode household purchasing power, weighing on private consumption.
Noble Francis, Economics director, CPA: It’s difficult to say at this stage. Whether the UK economy outpaces other developed economies will be highly dependent on two key factors. Firstly, it will depend on the extent to which different countries enact social distancing restrictions again in response to current and future Covid-19 variants plus the fiscal stimulus respective governments do in response to sustain, particularly, person-to-person interaction services such as hospitality. Secondly, growth prospects for developed countries will depend heavily on the extent to which high inflation during the next few months affects consumer and business confidence and, consequently, consumer spending and business investment.
Former senior official: We should be catching up after suffering a bigger hit last year than most economies but the continuing problems with trade and labour supply are likely to hold us back even if fiscal policy continues to be relaxed.
Andrew Goodwin, chief UK economist, Oxford Economics: Omicron looks set to make Q1 2022 very challenging. But over the year as a whole we think the UK will outpace most of its peers, simply because it has more lost ground to make up. Sectors heavily reliant on social consumption were reporting output well below ‘normal’ levels even prior to Omicron.
Andrew Hilton, director, centre for the study of financial innovation: Who writes these questions? What happens if it is just ‘in the pack’ — which is more likely?
Dawn Holland, Fellow, NIESR: Weak productivity growth, exacerbated by the impacts of Brexit, will see the UK economy continuing to lag behind other developed economies in 2022.
Paul Hollingsworth, chief European economist, BNP Paribas: Although its annual real GDP growth is likely to be higher than other developed economies in 2022, this reflects a lower starting point for the level of GDP as opposed to a genuine outperformance.
Ethan Ilzetzki, Associate professor in Economics, London School of Economics: UK GDP growth will slightly over-perform other developed economies in 2022 because its shortfall relative to the pre-crisis trend is larger at year-end 2021. Once GDP recovers to its pre-Covid-19 trend, I expect less remarkable growth as the realities post-Brexit Britain and stagnant population growth return to the fore.
Dave Innes, Head of Economics Joseph Rowntree Foundation: As with 2021, the virus will be the main decider of economic growth. New variants are a common shock across developed economies but can have a different scale of impact. The UK currently looks particularly vulnerable to Omicron which could mean it’s again starting the year with the lost ground to make up. I expect the government will again provide fiscal support during periods where the virus depresses demand and that will help restore growth afterwards.
Beyond the impacts of new variants, I expect the UK economy to continue to grow at a similar pace to the eurozone, but not make up lost ground from the start of the pandemic.
Dhaval Joshi, chief Strategist, BCA Research: The UK economy will lag its peers in 2022.
The UK economy fell furthest in the first wave of the pandemic, with GDP collapsing by 22 per cent, compared with 12 per cent in Germany, 10 per cent in the US, and 8 per cent in Japan. So, unsurprisingly, in the subsequent rebound, the UK has bounced the strongest.
But now that the post-pandemic rebound is mostly complete, the ongoing headwind from Brexit will become the main differentiator of UK growth versus other developed economies.
As such, I expect the UK economy to lag its peers in 2022.
Deanne Julius, distinguished fellow, Chatham House: The UK will lag growth in the US but be higher than that in the EU. Momentum is strong partly because excess savings (as a share of GDP) are higher in the UK than in most EU countries. Business investment is also likely to be strong due to the accelerated tax write-off while the EU package is slow to get off the ground.
Saleheen Jumana, chief economist and Head of Sustainability, CRU Group: The UK annual GDP growth rate is forecast to outpace its G7 peers in 2022. While this is good news it may not be celebration-worthy. Why? Because the higher UK growth rate is going to reflect the larger contraction of the UK economy during Covid-19, followed by a more sluggish recovery.
We forecast the UK to be one of the last economies to regain its pre-pandemic size. By the end of 2022, we do expect the UK to surpass its pre-pandemic size, but the gain is going to be smaller than other developed economies.
Lena Komileva, chief economist, (g+) economics: The UK economy was worst hit by the pandemic among major economies, with the greatest shortfall of economic activity relative to pre-pandemic levels, as well as a higher inflation shock; the effects of a weaker starting point and higher price moves will be a stronger “catch-up” percentage change in UK nominal GDP in 2022 in the international comparison.
Barret Kupelian, senior economist, PwC: The outlook for most advanced economies seems to be highly uncertain. So, it is difficult to make any predictions with any degree of accuracy. Having said that, there are three reasons that make me worry about the short-term outlook of the UK economy:
First, the looming combination of tax rises coming through at the beginning of the second quarter of next year — namely the NIC hike as well as the freezing of the income tax thresholds.
Second, high inflation, which is likely to persist, given the expected increases in the energy price ceilings that is due to be refreshed in April.
Third, the uncertainty around the latest wave Omicron. Even though we are not fully clear about the epidemiological outlook, personal responsibility has seemingly translated into effective lockdowns of some sectors of the UK economy. The more muddled government messaging remains, the more likely it is that some sectors of the economy will remain in the “deep freeze”. What seems to be more certain though is that we’re likely to start January 2022 shortages in some sectors of the economy due to the rapid rise in the cases of people with Covid-19 who will need to care for others or self-isolate.
All three of the factors I mention above mean that it is consumer spending that will be hit the most which is the biggest driver of growth in the economy. Britain’s competitors, particularly those in the EU, have less to worry about tax rises. In fact, the next-generation EU investment programme, coupled with the suspension of the fiscal rules for 2022 mean that the fiscal authorities in the EU and Eurozone will continue to maintain an accommodative fiscal stance which should help and support growth.
Finally, the Brexit question mark still remains for the UK. On the first day of 2022, full customs controls, which were postponed a few times in the past, will be enforced. We still don’t know how rigorous the implementation of these rules will be but they will nonetheless be an additional burden to doing business.
Ruth Lea, Economic Adviser, Arbuthnot Banking Group: It could well be that the UK grows quicker than other developed economies in 2022, but, this is more likely to reflect the unusually large “measured” drop in GDP in 2020 and the need to “catch up”. Otherwise, I expect growth to be fairly unspectacular all around.
John Llewellyn, Partner, Llewellyn Consulting: It will lag. In addition to the current headwinds faced by all economies, it has also those coming from Brexit. One manifestation will be exports being weaker than they would have been otherwise. More importantly, the inflation impact will oblige the Bank to be more restrictive than other major central banks.
Gerard Lyons, chief economic strategist, Netweatlh: My forecasts echo the message from the IMF and OECD, namely that UK economic growth will exceed that of the US and eurozone in 2022. Despite this, I would not use the term outpace, as I expect the UK to experience a similar growth profile to other developed economies in 2022.
Steve Machin, professor of Economics and director, Centre for Economic Performance, London School of Economics: Lag behind, because it faces the same global trends, but has additional factors restricting growth including the continued effects of Brexit.
Christopher Martin, professor, University of Bath: I think it will lag behind. The UK has performed worse than most other large economies since the pandemic began. I can’t see anything that will change this; consumer expenditure is restrained, investment has been weak since the 2016 referendum, government expenditure is subject to political constraints, and Brexit is impacting the current account.
David Meenagh, Reader, Cardiff University: I expect the UK to grow a bit more than other developed economies in 2022. I expect public spending to fall to pre-Covid-19 levels, which should mean fiscal policy can support the economy.
Costas Milas, professor of Finance, University of Liverpool: Under the assumption that the rollout of the (booster) vaccine programme takes off again, I am pretty confident that the UK economy will outpace most other developed economies. Needless to say, this is very short-sighted because the virus will catch up with us again if the vaccine rollout in the rest of the world lags significantly . ..
Patrick Minford, professor of Economics, Cardiff University: I am looking for growth of 8 per cent year on year with UK recovery to trend, more than most developed economies.
Andrew Mountford, professor, Royal Holloway, University of London: I expect the UK recovery will continue to be slower than most other developed economies that have managed the pandemic more successfully. Comparing GDP growth is problematic due to methodological issues and so employment levels are a better guide and these do provide evidence of a relatively slow UK recovery, eg https://voxeu.org/article/economic-impact-coronavirus-uk-businesses, https://www.oecd.org/employment-outlook, https://commonslibrary.parliament.uk/research-briefings/sn02784/. One aspect of the past year that has surprised me has been the lack of a rise in unemployment following the end of the furlough. Overall employment levels are still lower than pre-crisis levels, (by about half a million in November), but this is manifested in a drop in labour force participation and a tight labour market for those participating see https://www.employment-studies.co.uk/resource/labour-market-statistics-november-2021
John Muellbauer, professor, Oxford university: Not at the bottom but near the bottom of the pack of the G7 economies. Delayed responses to Omicron are likely to cause more damage to the economy later. Brexit continues to be a deadweight burden on growth prospects.
Andrew Oswald, professor of Economics and Behavioural Science, University of Warwick: Lag behind. Why: Brexit’s repercussions can be expected to become ever-clearer.
David Page, Head of Macroeconomic Research, Axa Investment Managers: The headline growth rate for the UK is likely to outpace other developed economies — we forecast 5.2 per cent — but this still mainly reflects a catch-up with the scale of the drop in UK GDP far worse than most others. Hence in terms of the level of overall activity, we see the UK clearly recovering more slowly than the US and China and also slower than the eurozone with capacity constraints weighing on UK activity — largely Brexit related.
Alpesh Paleja, Lead economist, CBI: We expect the UK to be roughly in the middle of the pack. The recovery was initially supported by a strong vaccine rollout and high uptake, which stood in contrast to developed countries in Europe. While this gap has now largely closed, a comparatively quicker booster campaign should keep the UK a little further ahead. We’ll also see tailwinds from strong labour market activity and firm investment appetite.
However, the Omicron variant is a curveball. Should it hit activity in the UK to a greater extent than other countries — either through significant voluntary limits on social mixing or the introduction of tighter mandated restrictions — we could see the UK slip down the rankings.
Regardless, it’s likely that the UK will lag behind the US, where direct fiscal support for households has been stronger, and where there is less sign of GDP “scarring” from the pandemic. In this regard, the jury is still out on which form of policy support has been most effective (ie furlough/job support schemes vs more direct income support for households).
Ann Pettifor, director, Policy Research in Macroeconomics (PRIME): UK trade performance on imports and exports has been among the worst of all OECD economies, with Brexit exacerbating the pandemic. This significant fall in total trade (compared to 2018) is an outcome, or consequence, of weak economic activity at home. Flat business investment is an ongoing key constraint. That is why we expect the UK will perform (in GDP terms) below the level of advanced economies in 2022. Annual GDP is likely to rise by around 3.5-4 per cent (well below HMT’s ‘comparison of independent forecasts’ which range up to 8.1 per cent). UK GDP fell further in 2020 than almost all other OECD countries and ‘rose’ a bit faster in consequence in 2021, partly due to technical reasons in ONS calculations of public sector ‘production’. We consider this ‘catch-up’ has now ended. Tax rises and ‘new austerity’ measures will constrain economic activity further.
John Philpott, director, The Jobs economist, consultancy: Slightly outpace mainly because there is still some ground to make up for the relatively big hit to output during the pandemic.
Kallum Pickering, senior economist, Berenberg Bank: Last year, the UK strongly outperformed initial expectations and should do so again. Despite the UK’s unique Brexit related challenges and persisting global supply chain issues, which hurt trade and consumption and create uncertainties which may impact investment, underlying fundamentals are healthy. Consumers benefit from record-high net worth, booming labour markets and a huge pile of excess savings. Businesses are posting a record number of job vacancies and solid investment intentions. The banking sector is well capitalised and can supply credit at affordable rates to households and businesses. Economic policy provides a tailwind. Alongside other major advanced economies, the UK is likely to continue to grow at a rate well above its long run potential even after real GDP exceeds it pre-COVID level in Q1 2022.
Christopher Pissarides, Regius professor of Economics, London School of Economics: It will lag behind because (a) Brexit and uncertainties about trade are still present, (b) the government’s troubles, inflation and the fact that the Omicron variant is having a bigger impact on society here than elsewhere are big sources of uncertainty. I am fearful of the consequences without knowing exactly what to expect
Ian Plenderleith, chair, Sanlam UK: Drag behind, because of drag from Brexit and unstable politics.
Richard Portes, professor of Economics, London Business School: Lag. Covid-19 and incoherent policies.
Jonathan Portes, professor of Economics and Public Policy, King’s College London: The key UK-specific factors for the year ahead will be fiscal policy, where significant tax rises will be implemented in April; and Brexit, where the additional trade barriers with our largest trading partner that were introduced in January 2021 will be supplemented with additional import controls in January 2022. So while global influences (most of all the pandemic, but also US monetary policy) will dominate, the UK is likely to underperform somewhat.
Vicky Pryce, chief economic adviser and board member, CEBR (Centre for Economics and Business Research): It is not surprising that the UK economic growth outpaced those of other G7 nations in 2021 given the sharper fall in GDP in 2020 compared to most others. But GDP looks like it was still further below pre-pandemic levels by the end of 2021 than those of other nations, including the eurozone, For 2022 it is unlikely that this better relative performance will be repeated as the fresh Covid-19 outbreaks, planned increases in stealth taxes via the freezing of income tax thresholds and the rise National Insurance contributions will have exacerbated the negative impact on the growth of a continuing poor trade performance post Brexit. The worsening inflationary pressures will also reduce real personal disposable incomes further and slow spending and growth.
Thomas Pugh, UK economist, RSM: The UK economy will grow by 5 per cent in 2022, depending on the development of the Omicron variant. That will be faster than the US and the EU. However, growth rates are telling a distorted picture at the moment. The main reason the UK will experience faster growth next year is because it experienced a much bigger fall in output than most other developed economies in 2020 and therefore has more room to catch up. If we take where we think the UK economy will be at the end of 2022 compared to where it was before the pandemic, then the UK is still likely to be lagging behind the other major developed economies.
Sonali Punhani, chief UK economist, Credit Suisse: Slightly Outperform. In the winter, Omicron is likely to slow growth, on top of other headwinds such as supply and labour shortages, rising gas prices and withdrawal of fiscal/ monetary support. But the accelerated booster program and high take up of vaccines, especially among the elderly, can potentially put the UK in a better place to deal with rising cases of Omicron over the winter. Once winter passes, the economy should recover on the back of strong household and corporate balance sheets, a tight labour market and robust wage growth and healthy investment inventions. But effects of Brexit are likely to linger- reduced trade with the EU and labour shortages should continue to weigh on growth.
Morten Ravn, professor, University College London: It will continue to lag behind. The pandemic is still not under control, UK public debt is high and it will be hard to engineer either a stimulus or a significant tax reform. Moreover, Brexit is having a real economic impact now. In addition, UKs productivity problem still needs to be resolved.
Ricardo Reis, professor of Economics, LSE: Probably it will lag behind, as there is less fiscal stimulus than either the US or EU and the continuing negative effects of Brexit on trade and growth will drag it down (with none of the supposed less regulation or lower taxes in sight to pull it up).
Phil Rush, CEO, Heteronomics: The UK’s growth will probably be above its peers again in 2022 for the same reason as in 2021. The economy had to climb out of a deeper hole, raising growth rates from the bottom and dragging it out for longer. In level terms, the UK will probably remain a global laggard.
Holger Schmieding, chief economist, Berenberg: The UK will modestly outpace other developed economies in 2022. Having been far behind most other economies in 2020, the UK still has more room to catch-up with the countries that managed the pandemic better. The UK will narrow the gap but probably not catch up fully with the eurozone in terms of its GDP relative to its pre-pandemic level.
Yael Selfin, chief economist, KPMG: While the UK is likely to be ahead of other developed countries in the vaccination programme, the impact on supply chains could be more acute, while labour market shortages may also prove more persistent.
Andrew Sentence, senior adviser, Cambridge Econometrics: I can’t see any reason why the UK should outpace other developed economies in terms of growth in 2022. Underlying productivity growth is weak and there is a limited pool of unemployed workers to draw on, as the high level of vacancies indicates. So I would expect the UK to be an average or below average growth performer in 2022.
Philip Shaw, chief economist, Investec: Mechanically, UK growth looks likely to be outpaced by that of its European peers, largely because its initial post lockdown rebound took place earlier in 2021 and that the current strength of natural gas prices looks set to make a bigger dent on UK household finances than those on the Continent. It is too early to tell where Omicron variant related restrictions will have a bigger impact. Britain might enjoy slightly faster growth than the US, partly due to the uncertainty over whether President Biden’s $1.75trn Build Back Better bill will get through the Senate and if so, in what form.
Andrew Simms, co-director, and research associate, New Weather Institute, and Sussex University, Centre for Global Political Economy: The UK is likely to lag behind other developed economies in things that matter — such as meeting climate targets and reversing inequality (or ‘levelling-up’) — because while the government is fond of making impressive-sounding promises, it appears allergic to developing and implementing the policies needed to make them happen.
The task of re-engineering the economy to operate within climate targets, reviewed only weeks ago at the critical Glasgow Climate Summit, has huge implications and opportunities across all sectors. Yet, as the chief executive of the official advisory body, the Climate Change Committee (CCC), said at the time, “The government is nowhere near achieving current targets.” The reason this matters so much is that, apart from being needed to preserve the ecological conditions in which the economy and society can function, it is now a binding macroeconomic frame with a target of cutting emissions 78 per cent by 2035.
But, as the CCC note, on the current lack of progress, the UK will be adding to a target busting temperature rise of 2.7°C by the century’s end. More worryingly the CCC say that this can ‘in theory’ be brought down to just under 2°C — but still well short of the 1.5°C needed. For a rough handle on what this means in practice, for people in the richest 10 per cent globally, emissions need to drop to one-tenth of what they are set to be in 2030. Conveniently, a rule of thumb is that the carbon footprint of taking a train is one-tenth that of flying. Emissions reductions are needed for the UK of something like 12 per cent year on year.
But a quick look at recent government policy crumbles any confidence of a strong link between targets and action. In Rishi Sunak’s Budget, he famously failed to mention climate at all. Beer was referred to more than the critical threat to humanity. Instead of encouraging a shift from aviation to train travel, he halved air passenger duty on domestic flights — the most easily replaced by train travel. The long-lived freeze on vehicle fuel duty was maintained, alongside spending to expand the road network that dwarfs public investment in low carbon transport alternatives. These are all things that extend and lock-in the UK’s addiction to a polluting, high-carbon economy.
Compare this to the move in France to ban short-haul, internal flights where a train journey alternative exists or Paris’s plan for major car reduction that includes the removal of 70,000 car parking spaces. Or, the case of Oslo in Norway going substantially car-free.
The UK also needs to guard against a rush of ‘greenwash’ and false solutions. Already there is far too much reliance on carbon offsetting, when a study for the European Commission showed that 85 per cent of the offset projects fail to reduce emissions, and only 2 per cent with a high likelihood of reducing emissions.
The CCC highlight a £50 billion annual investment gap up to 2030 for the UK to be on course to meet its targets. In the United States, although many were disappointed, President Biden’s Infrastructure Bill allocated over $100 billion towards public transport and rail — with job creation a major part of the rationale. If comparison with the US feels unfair, the UK government could do worse than look at South Korea’s green new deal investing over $60 billion to lower emissions and create 650,000 jobs by 2025.
By contrast, the UK Chancellor allocated £4.8bn to a levelling-up fund to cover the remainder of this parliament — which even when added to the modest sums for green spending, to use the language of budget commentary still looks like very small beer. It is also a missed opportunity to achieve multiple goals at once through investment in a green new deal that could target much-needed home energy efficiency and renewable retrofits and green transport infrastructure. If the government is remotely serious about levelling up, it’s worth remembering that post-unification, the levelling up process in Germany took around took €2tn over 25 years.
Nina Skero, chief Executive, Cebr: We expect the UK economy to expand 4.7 per cent in 2022, slightly above the rate of growth anticipated for the United States and large European economies (4.0 per cent — 4.5 per cent). While the Omicron variant poses a downside risk for economies across the world, the UK government has signalled that it will continue to provide fiscal support (eg the hospitality and leisure sector funding announced in the days before Christmas) to help ease the impact of any restrictions or even the impact of voluntary consumer caution.
Should further lockdowns be enforced, this would lead us to downgrade our forecasts, although with businesses and consumers now well-versed in ‘lockdown living’ we would expect any contraction in economic output to be far milder than that of spring 2020.
James Smith, economist, ING: The path of UK GDP is unlikely to look that different to Europe in 2022. Omicron almost certainly means a hit to January output, though GDP will likely be very close to pre-virus levels again by the end of the first quarter. Beyond Covid-19, the consumer faces a challenging few months on higher inflation — perhaps a little more so than continental Europe, given the more noticeable withdrawal of economic support from the government, as well as the UK’s greater exposure to natural gas price spikes. But 2022 could see the return of investment, which has been effectively flat since the 2016 referendum. Corporate balance sheets are in decent health (on average) and higher investment intentions are no doubt being aided by the government’s super-deduction.
Andrew Smith, Economic Adviser, Industry Forum: The UK will lag behind next year as the policy is perversely tightened in mid-pandemic. The OBR’s forecast of another year of 6 per cent GDP growth is entirely dependent on an unprecedented 10 per cent jump in consumer spending — at a time when real incomes will be squeezed by high inflation on the one hand and tax rises on the other. The numbers only add up with the heroic assumption that the personal sector finances a catch-up binge with it’s Covid-19-swelled cash balances — but these are unevenly distributed and, at the end of the day, there are only so many extra meals out anyone can stomach. Under the circumstances, the BoE’s monetary tightening can only be described as kicking the man/woman when they are already down.
Andrew Smithers, founder, Smithers & Co: Lag I hope. Money supply is growing too fast and needs to be slowed.
Alfie Stirling, director of research and chief economist New Economics Foundation: The least bad economic forecasters for some time now have been epidemiologists. In the short- to medium-term, most things continue to be largely contingent on the evolution of the virus. Honing in on a narrow time period like a single calendar year means things like the geographical origins of future variants of concern, and the timings of different waves across countries, will likely prove the crucial variable in comparative economic performance. At this stage, none of this is possible to predict, least of all in economic models.
Outside of future waves of infection, I would expect the UK to be closer to the middle of the pack in terms of the rate of recovery next year, compared to other developed economies. The UK still has further to go in order to catch up pre-Covid-19 levels than many other countries. All else being equal this would imply a greater potential for faster growth. Offsetting this, however, at least to some extent, will be the effects of Brexit in terms of labour shortages and trading frictions. Not only will this be a drag on the rate of recovery in the short term, compared to other countries, but it is also likely to limit the overall potential for a full recovery in the medium- to longer-term too.
Gary Styles, director, GPS economics: The UK is likely to outperform the US and European economies in 2022. However, this position is unlikely to be sustained in 2023. The UK economy suffered a much deeper slump in 2020 than many other economies and is therefore expected to recover more of this lost ground in both 2022. Furthermore, as the UK has been hit by the third wave of Covid-19 (Omicron) earlier than most it should be able to recover more quickly than other economies.
Suren Thiru, chief economist, British Chambers of Commerce: The UK will almost certainly lag behind most other developed economies in 2022 because the economy is more exposed to the ongoing impact of Covid-19, staff shortages and supply chain disruption.
A greater reliance on household spending to drive growth leaves the UK more susceptible to the impact of new Covid-19 restrictions and renewed consumer caution amid rising infections. The prospect of ongoing post-Brexit disruption is likely to exacerbate the squeeze on growth from staff and supply shortages, compared to other developed economies.
Consequently, the UK economy is only likely to return to its pre-pandemic level in Q2 2022, behind many of our international competitors. We now expect UK GDP growth of around 4 per cent for this year, lagging most other developed economies, with the likely exception of Japan and Germany.
Phil Thornton, director, Clarity Economics: Lag behind. In 2022 (as in 2020) economic performance will be driven by the response to the next evolutions of the coronavirus pandemic and by the endogenous state of the economy. At the turn of the year, the reaction function appears damaged with politicians contradicting scientists and politicians with the ruling party disagreeing with others, quite fundamentally. One issue will be whether the government will be able to use fiscal levers to ameliorate the impacts of future lockdowns, as and when they arrive
Samuel Tombs, chief UK economist, Pantheon Macroeconomics: The UK economy probably will remain the G7’s laggard in Q1, as it has tended to underperform when Covid-19 is in the ascendant, due to the relatively large share of consumer services activity in GDP and higher uptake of homeworking. The recovery in exports also likely will continue to fail to keep up with those in other advanced economies, due to the drag from Brexit. But the UK economy will not be alone in 2022 in enduring fiscal tightening and high inflation. British households also have amassed a larger stock of “excess savings” during the pandemic than their European counterparts, suggesting that they will be better placed to spend more even though their real incomes will be falling. So by the end of the year, the UK probably will be in the middle of the G7 pack.
Kitty Ussher, chief economist, Institute of directors: The UK will lag other economies but the effect will be slight: the headline is still that ours is an economy that wants to grow and demand will remain strong.
The lags come from two sources. First, UK macro performance is particularly dependent on household spending which is more sensitive to changes in the path of the pandemic. Second, our adjustment to life outside the EU is still ongoing so we will experience greater trade friction at our borders than other comparable economies.
John Van Reenen, School professor & director, POID, London School of Economics: Lag behind — the impact of Brexit (especially on services) will hold us back
David Vines, Emeritus professor of Economics, Oxford university: I expect the UK to lag significantly. In the short term the spike in Covid-19 cases is likely to be severe and to provoke the need for a longer lockdown than in other countries which have dealt with Covid-19 more intelligently. In the longer term, the damage from Brexit is likely to be severe. I think that the estimates of the effect of Brexit by the Office of Budget Responsibility are, if anything, likely to be over-optimistic. We have yet to see the full consequences of Brexit for the financial sector. And I am particularly concerned about the way the UK is likely to be shut out from European co-operation, and funding, in scientific research.
Sushil Wadhwani, chief Investment Officer, PGIM Wadhwani: The UK economy is likely to lag other developed economies during 2022. Factors that might contribute to its underperformance include the fact that labour supply problems appear to be more acute than many other developed countries. This might, in part only, be explained by Brexit and its impact on migration. Not only will supply act to directly limit UK growth but there will be associated demand effects too. The wage inflation we see is likely to elicit much more monetary tightening here than is likely in, say, the eurozone, Japan or Australia. Over time, this should slow the UK economy relative to its peers. Another risk we need to monitor is the reluctance of the UK government to provide assistance to businesses suffering on account of the Omicron wave. Consequently, we could end up seeing more scarring than was true after the first wave.
Martin Weale, professor of Economics, King’s College, London: It will lag behind with the continuing drag of Brexit
Simon Wells, chief European economist, HSBC: If you look at forecasts for 2022 economic growth, it looks like the UK will outpace most large economies. But this partly reflects a lower starting point. We expect UK GDP to return to pre-pandemic levels of activity in Q2 2022, about six months later than the eurozone and a year behind the US.
Peter Westaway, chief economist, Europe Vanguard: I had previously been expecting the UK to grow more quickly than other developed economies in 2022, mainly because it still had the most lost ground to make up following the pandemic-induced fall in activity.
But now, given the further slowdown caused by a combination of consumer reticence and new government restrictions, it’s not conceivable that the UK will be hit more severely than the rest of Europe and certainly than the US.
Overall, still a decent chance the UK will be among the countries with the highest growth rate, even though the level of activity still lags behind its pre-pandemic trajectory by more than many.
Michael Wickens, professor of Economics, York and Cardiff Universities: Slightly outpace if current trends continue. The dangers are more unexpected Covid-19 infections and whether the Bank decides to control inflation
Trevor Williams, professor, Derby University: Will lag as the recovery is running out of steam, and the Brexit effect of a labour market shortage hits productivity.
Stephen Wright, professor of Economics, Birkbeck University: Very little to go on. All the obvious bad stuff due to Brexit is likely to be masked by whatever happens with Covid-19. Since we’ve gone into Omicron earlier than most, maybe we can get out of it sooner, which may allow the UK to be ahead for a while. But that’s about the best we can hope for.
Linda Yueh, Adjunct professor of Economics, London Business School: The UK economy is likely to grow in line with other developed economies with similar levels of vaccinations. The IMF forecasts place the UK slightly behind the US in 2022 and ahead of continental Europe and Japan, for instance.
To what extent will the Bank of England be in control of inflation by the end of 2022?
Melanie Baker: Inflation is likely to peak in April 2022 in the UK and be substantially lower by the end of the year which will make the Bank of England appear more in control of inflation. Key to whether they are in control of inflation will be what happens to wage growth and to inflation expectations. Raising rates in December against a deteriorating growth backdrop is a good downpayment against inflation expectations de-anchoring.
Kate Barker: Being prepared to act now should dampen the propensity for higher inflation to get baked into expectations. However, the labour market has tightened significantly for several sectors and risks remain to the upside.
Nicholas Barr: Upward pressure on prices arises in part from higher public spending related to the pandemic but in part also because of significant pandemic-related structural adjustments. The latter are likely to continue beyond 2022, so inflationary pressures will remain.
Ray Barrell: Inflation some two per cent above target is not inflation out of control. We are going through a period of large changes in relative wages and prices. This is best managed with inflation noticeably above two per cent so fewer firms have to cut prices. Energy prices are likely to be permanently higher. Some firms will go out of business and industries shrink because of the impact of Covid on consumption patterns. If there are no more deep structural shocks inflation could be back down to around two per cent by early 2023. The Bank can manage the process.
Martin Beck: By the end of this year the forces which have pushed inflation up so rapidly in recent months should be exerting the opposite effect. Even a stabilisation of oil and energy prices at current high levels would exert a strong drag on inflation in the second half of this year. And a rotation of consumer demand from goods back to services as Covid impacts fade, combined with extra capacity to produce components and other inputs coming on stream, should bring down goods price inflation. Meanwhile, structural forces which threaten persistently higher inflation are lacking. Workers’ bargaining power may gain from lower inward migration and greater respect for those doing essential, if low paid, jobs, but we won’t see a return to the 1970s. And as long as the Bank of England continues to respect its mandate, while taking advantage of the flexibility it possesses in achieving the 2 per cent inflation target, it’s hard to see how persistently high inflation could arise. But while inflation should be heading back to the 2 per cent target by the end of this year, this will have very little to do with the Bank of England’s actions.
David Bell: Its armoury to control supply-side inflation is limited. Interest rate increases have little effect on increases in the prices of final goods, components, and raw material inputs when these are primarily driven by international shortages. Interest rate increases at the level currently being envisaged will not quell wage growth, but we will not have a return to a 1970s style wage-price spiral due to the substantial reduction in the strength of collective bargaining that has taken place since then.
Philip Booth: It is unlikely to be in control if it keeps responding to supply shocks such as the discovery of new variants by loosening monetary policy. Each time inflation rises, real interest rates fall. So, without a deliberate rise in rates, even if the Bank does nothing policy is, in effect, loosening. The Bank of England seems to have lost interest in inflation.
Nick Bosanquet: It will not be in control: inflation likely to be 4 per cent at end 2022. Inflation can be temporary due to single shot external cause such as energy prices . . . or it can become a self sustaining process with multiple causes over a period of time. Shortages and price rise for key raw materials this year will lead to price increases for finished products next year. On OECD data 70 per cent of firms expect to raise prices. The high inflation problem will run into 2023.
Erik Britton: Define ‘in control’ . . . Most likely, inflation will gradually drift back down towards the target, but there is almost an equal likelihood that inflation expectations will slip their anchor and that slippage will be accommodated by the Bank, perhaps with an eventual shift to a higher inflation target (which the Bank would doubtless still describe as inflation being under its control). Higher inflation uncertainty now than at any time since the early 1980s. Close to a bimodal forecast distribution, rarely seen in the wild.
Jagjit Chadha: An operationally independent central bank with a floating exchange rate chooses the inflation rate it wants in the medium term. And inflation does seem likely to fall over the course of 2022 but more so if the Bank could be clearer about its reaction function and the preparedness to raise interest rates from extraordinarily low historical levels. The ground for quantitative tightening must be prepared and some mapping out of how we will return to normal interest rate levels.
Victoria Clarke: We expect that the Bank of England will hike again in early 2022 and return Bank Rate to its pre-pandemic level of 0.75 per cent in 3Q22, as it judges that actions speak louder than words when it comes to guarding against second-round inflationary risks. But we remain cautious about the breadth of current inflationary signals and still see headline CPI inflation above 3 per cent as 2022 closes. Importantly, with one legacy of the pandemic a smaller economically active population, and with some activities (like healthcare) likely to hold more workers than normal as we ‘live with Covid’, we think this should continue to underpin stronger pay awards. We do not expect core inflation to dip below 2 per cent at all in our forecasts out to end-2023.
David Cobham: More or less, interest rates will rise at some point and some of the supply-chain-induced inflationary pressures will subside.
Brian Coulton: Inflation should be falling by the second half of next year as global consumer durable goods prices stabilise and energy shocks unwind. But services inflation will rise somewhat and keep core inflation above 2 per cent. Global shortages of consumer goods could last longer than expected which is an upside inflation risk. Wages could also accelerate by more than expected, although the recent change in direction of monetary policy should help anchor inflation expectations.
Diane Coyle: It depends entirely on how the Monetary Policy Committee responds between now and then. Inflation isn’t out of control yet.
Bronwyn Curtis: The Bank of England will underestimate the level of inflation. Inflation will fall from 5 per cent plus levels, but it will still be closer to 3 per cent than 2 per cent by the end of the year. The Bank of England will be slow in raising rates.
Paul Dales: By much more than it is now! By the end of 2022, we think that inflation will have fallen back from a peak of just above 5.0 per cent in April 2022 to between 2.0 per cent and 2.5 per cent. We suspect it will fall further to the 2.0 per cent target in early 2023. That’s partly based on our assumption that the boost to inflation from global costs and shortages will start to ease from the middle of 2022.
This explains why we think the Bank of England will raise interest rates only twice in 2022 (to 0.75 per cent) rather than the three to four times (to 1.00-1.25 per cent) the financial markets appear to be expecting.
Richard Davies: I expect the Bank to be in control of inflation. I think the public understanding and intuition for where inflation is coming from (Covid and Brexit supply shocks, ie transitory) is greater than commentators imagine. So even with inflation far above target, I don’t expect long term damage to (ie rising) inflation expectations. Overall, on inflation, the Bank of England performance has been strong since 1992 and I expect the Bank to be able to ride this out.
Howard Davies: They started tightening too late so inflation is likely to persist through 2022 and beyond.
Melissa Davis: The combination of easing supply-chain pressures, commodity price annualisations, some mean reversion in tradable goods prices and slowing growth mean inflation should be back at target by the end of 2022 — and it could even undershoot, depending largely on the evolution of commodity prices. The challenge for the Bank is to strike the right note between maintaining credibility now and not undermining the recovery in 2022/2023.
Paul De Grauwe: The Bank of England will have control of inflation by the end of 2022. The factors that drive the inflation surge (high demand and disrupted supply) will abate.
Panicos Demetriades: The Bank of England has already signalled that it will not allow inflation to get out of control with its surprise rate increase on 16 December but the question is at what cost.
Covid is wreaking havoc on supply chains, while the rise of Omicron is generating additional uncertainty about the ongoing recovery. Raising rates now may be too early as the recovery may yet reverse if a new lockdown is deemed necessary for public health reasons. However, the Bank is clearly worried about the outlook for inflation to raise rates now. Its dilemma is certainly tougher than that of other central banks in developed countries because of the effects of Brexit on the supply chain, labour shortages and trade costs. These are definitely interesting times for monetary policy!
However, trying to keep inflation under control by suppressing demand in the face of multiple supply shocks could make the Bank very unpopular, if its rate hikes continue in 2022.
Rate hikes will slow down the recovery and cause misery for homeowners with variable-rate mortgages. They will not solve supply bottlenecks, solve labour shortages or reduce trade costs.
What the UK needs is not a tighter monetary policy but a competent government with a structural reform agenda that would mitigate the adverse effects of Boris-style Brexit.
Wouter Den Haan: It is hard to know whether the Bank of England will be able to get inflation back to target without knowing what shocks will hit the economy, but the UK is blessed with a very capable team on the Monetary Policy Committee.
Swati Dhingra: Will try but there are too many inflationary pressures and structural problems.
Charles Dumas: By the end of 2022, the inflation picture will look very different globally, thanks to a sharp reversal of goods price inflation. Large parts of the supply side have adapted to accommodate high Covid prevalence, partly thanks to strong investment in software, but also thanks to strong Chinese capex in the medical goods sector, and robust investment at the global scale in manufacturing. Even if the Omicron variant scare rises, demand for consumer durables associated with the “Zoom Boom” will be much less than in previous waves, making for a significantly more modest inflation shock. Looking through Omicron, goods deflation in H2 looks set to be amplified by RMB depreciation as China hits its debt wall.
Indeed, the inflation threat for 2022 could come from periods of low Covid prevalence, as supply capacity on both the capital and labour side has atrophied. When Omicron recedes, demand will surge back to in-person services, but supply is now becoming inadequate. Overall, we think the bullwhip-down effects will still dominate.
In short, while inflation anxiety is likely to build into the new year, the narrative could shift dramatically in the second half. It’s important to realise, however, that Covid is endemic, and if it remains deadly, the direct effect on the economy over the longer term could be to raise inflation. This results from the bifurcation of supply side resources to cater for periods of both high and low Covid prevalence, while Covid-sensitive demand will only ever land on one side of this supply bifurcation at any given point in time; supply is built ex ante for both worlds, but demand is only ever in one world at a time. That means an inbuilt insufficiency of supply, and repeated inflation shocks, followed by periods of demand deflation. The supply side is not yet fully adapted to that reality, however, meaning the bullwhip-down effects are likely to dominate in 2022H2.
Wohlmann Evan: We expect inflation to moderate in 2022 in line with slower growth in economic activity and a very gradual tightening in monetary policy. The acceleration in wage growth will likely prove temporary and remain concentrated in those sectors where labour supply is tightest. That said, the risk of higher and more persistent inflation poses a risk to the recovery, particularly if the currently high levels of inflation start to become embedded in wage negotiations.
Noble Francis: The Bank of England has consistently underestimated inflation as the supply side issues and sharp energy cost rises spread across the economy. The Bank of England is likely to increase its base rate two further times during 2022 but interest rates will still remain below 1 per cent. Whilst this will have an impact on demand pull inflation, it is unlikely to impact significantly on cost push inflation. Energy costs will be less of an issue in the second half of the year as will some supply bottlenecks but other supply constraints will only be resolved in the medium-term. As a result, UK CPI inflation will slow in the second half of the year but will still remain above the Bank’s target at the end of 2022.
Former senior official: I don’t think they have lost control of inflation but with wages likely to respond to prices (and public service wages rebounding) inflation is likely to hold up for most of this year even if interest rates continue to rise.
Andrew Goodwin: I don’t think the Bank of England has lost control of inflation in the first place. The vast majority of the overshoot this year has been due to factors outside of its control, and these pressures should melt away during 2022. From my perspective, the idea that the Bank of England needs to tighten policy to maintain its inflation-fighting credibility is overblown.
Andrew Hilton: Again, who writes these questions? To what extent are any central banks ‘in control’ of inflation if (for instance) inflation is caused by an exogenous shock like an oil price rise, or if it is caused by an unprecedented fiscal response to a pandemic? The implicit assumption is that it would be a failure if the central banks were not ‘in control’ — but that may simply not be the case.
My view (FWIW) is that inflationary expectations are rapidly becoming anchored, and that it will be very difficult indeed for the Bank to turn them around. That means a base case CPI rise in (say) 2/2 2021 of circa 6 per cent.
Dawn Holland: A lot depends on the evolution of the pandemic. I would expect underlying inflation to be broadly under control, but bottlenecks and cross-border transport costs may continue to exert upward pressure on the headline rates.
Paul Hollingsworth: We expect inflation to still be more than 1pp above its 2 per cent target by the end of 2022, with greater signs of underlying inflationary pressures and lingering risks of above-target inflation persisting. That said, the monetary policy tightening cycle should be well under way at that stage and inflation should still be on a cooling trajectory — we would not characterise the Bank of England as having ‘lost control’ of inflation.
Ethan Ilzetzki: This is entirely up to the Bank of England, which has the tools to bring inflation down. The decision to increase rates on December 16th was a small, but important and, in my view, correct decision. It indicates that the Bank will attempt to rein in inflation, but time will tell. Inflation now exceeds 5 per cent, while real interest rates are below -3 per cent: a highly accommodative stance. Yes, uncertainties about the pandemic and the recovery abound, but none of these can be rectified with low interest rates.
Dave Innes: While the current spike in inflation is worrying, its drivers remain mainly transitory. I expect fuel prices to stabilise and supply issues to subside in 2022 and consequently inflation will begin to come down, but still remain high at the end of 2022.
Dhaval Joshi: The Bank of England’s monetary policy, which works by choking and stimulating aggregate demand, is ill-placed to ‘control’ inflation in 2022.
This is because the current surge in inflation is nothing to do with overheating aggregate demand. UK aggregate demand, even after its strong rebound, is still struggling to get back to its pre-pandemic trend. Meaning that aggregate demand is weak.
Instead, the current inflation comes from the massive and unprecedented DISPLACEMENT of demand from services into goods, combined with an inability to increase goods supply quickly enough. To the extent that I expect this displacement of demand to correct, inflation should cool in 2022.
But crucially, this rebalancing of demand will happen irrespective of Bank of England policy.
So I think it would be a huge mistake to connect cooling inflation with monetary policy. In that important sense, the Bank of England will not be ‘in control’ of inflation in 2022.
Deanne Julius: I expect the Bank will raise rates at least to 1 per cent by the end of 2022. This should have a cooling effect on the housing market, but is still below zero in real terms so is not likely to depress business investment.
Saleheen Jumana: Being in control of inflation means different things to different people. Unanticipated shocks make it impossible for inflation to remain at target at all times. I interpret being ‘in control of inflation’ as a situation where the average rate of inflation stays close to the Bank of England’s 2 per cent target.
We forecast inflation will fall from its current highs of around 5 per cent to less than 3 per cent by the end of 2022, as energy prices fall and the ongoing boom in consumer durables slows. That would take average inflation, over the five years ending 2022, to less than 2.5 per cent. That is close enough to 2 per cent, for me to conclude that the Bank of England will be in control of inflation by the end of 2022.
Markets are worried that the UK is entering an era of high inflation, like the 1970s. We are at a critical moment. There are risks that inflation could remain elevated for longer, should energy prices spike, supply chain disruptions persist or if labour market scarring ends up being more severe. Equally, inflation could be lower than expected if the new Covid variant, Omicron, has a large negative impact on consumer demand.
Lena Komileva: Inflation is largely the reflection of structural factors which are beyond the power of the Bank of England to control, but which will also exercise oversized control over Bank of England policy going forward.
For a fuller discussion see my FT column of July 2021: The answer to inflation fears lies in ending Covid disruption
Barret Kupelian: Evidence from the Bank of England itself shows that deviations from its 2 per cent inflation target are driven by food, energy and imported prices almost 2/3rds of the time are driven by global food and energy prices, FX movements and domestic tax changes. These are factors that are outside the direct control of monetary policy and most of the factors that have led to the high level of inflation in the UK are outside of the control of the Bank.
However, subject to the Omicron variant not leading to a massive upheaval of economic activity, I expect that the supply-chain pressures will abate towards the end of the year. We’ve seen some evidence of this happening in December and, if this trend continues, we should expect it to manifest in retail prices in the second half of the year. This should then give the appearance that the Bank (and indeed other central banks in advanced economies) have some control over the inflation rate.
Ruth Lea: Inflationary pressures, as we know, have been largely supply side/cost phenomena (supply shortages, rapid increases in fuels) & not “controllable” by the Bank. And this could well continue to end 2022. However, the Bank should be seen to act on the demand side to (try to) prevent “second-round” effects.
John Llewellyn: Unless the Johnston government uses its majority to limit the jurisdiction of the Bank, as it is threatening to with the courts, the Bank will be in control of inflation. But that will mean that it cannot be in simultaneous control of real GDP.
Gerard Lyons: The Bank of England has badly misjudged the persistence of inflation in the UK. I do not expect this rise in inflation to prove permanent, but it is not passing through quickly as the Bank expects and instead is persisting. Thus, the scale of the stimulus in 2021, particularly QE, was unnecessary.
Inflation will remain elevated and exceed the Bank’s 2 per cent target throughout all of 2022 and settle above the target in 2023. In that context, it would be premature to conclude the Bank will be in control of inflation by the end of 2022. Although the initial cause of this inflation shock was outside of the Bank’s control, it must be mindful of second-round effects.
That being said, annual inflation should be much lower at the end of 2022 than at its peak. I expect the annual rate of inflation to peak in the second quarter, around 7 per cent, and to decelerate from August onwards.
The economy faces a double whammy at the start of the year, from the consequences of Omicron and a cost-of-living crisis as inflation rises, and thus monetary policy should remain on hold in early 2022.
But as the economy rebounds and as the year progresses, I would expect the Bank to tighten policy, with interest rates returning towards 0.75 per cent, the pre-pandemic level, by year-end. This will also trigger some quantitative tightening, with the Bank having already outlined that a higher bank rate will trigger a reduction in its stock of purchased assets. With parts of the economy vulnerable in the wake of the pandemic, tightening by the Bank needs to be gradual and predictable.
It is not just about monetary stability in terms of curbing inflation, but the Bank’s actions, including low rates and QE, are also risking financial stability.
Steve Machin: It should be, but we will have to see if it can get back to the targets.
Christopher Martin: This all depends on whether price inflation leads to wage inflation. I suspect it will not, because the power of workers over wages has declined over the past 20 years. But that is just a guess. No one can make a confident prediction at this point.
David Meenagh: The Bank will be slow to increase rates and therefore I think inflation will still be significantly above the target by the end of 2022.
Milas Costas: To control inflation in 2022, the Bank of England needs to stop following Sicilian philosopher Gorgias and his ideas outlined in his famous work “Non-existent”. Gorgias put forward three arguments: that nothing exists; that, even if something in fact existed, it could not be properly known; and that, even it could be properly known, it could not be communicated through language.
What we did learn from the Bank of England in 2021 is that inflation pressures do not exist because current inflation is due to supply-side bottlenecks; that even if inflation pressures did exist, these could not be properly known (or measured) because of pandemic distortions; and that, if a proper plan of monetary policy was in place, it could not be communicated through language. Which explains, of course, why politicians and the media dubbed current Bank of England Governor Andrew Bailey, like his predecessor Mark Carney, the “unreliable boyfriend”. For starters, the Bank could adopt a more flexible monetary policy in terms of combining small in size Bank rate hikes with reductions in QE without conditioning the latter on the policy rate reaching 0.5 per cent.
Patrick Minford: Interest rates will need to rise to 5 per cent or close, which will restore control.
Andrew Mountford: The Bank of England doesn’t have a great deal of control over pandemic induced supply shortages and these appear to be behind much of the current increase in inflation in many economies. Indeed tightening credit in response to such supply shocks may do more harm than good.
John Muellbauer: Annual inflation is still likely to be running at 4 per cent or higher by December 2022. It is a global problem, with the US having continued high inflation given labour shortages due to early retirement and long- Covid, and the housing market still running hot.
Andrew Oswald: Very little. It is currently hard to view our nation as having an independent Central Bank.
David Page: To a large extent. By the end of 2022, we expect headline inflation to be falling back quickly towards the Bank of England’s 2 per cent mandate, with an expectation for it to fall close to it in 2023. However, the UK labour market does look tight and we expect it to warrant monetary policy tightening across the course of next year to ensure that the Bank of England’s target is consistently met looking through into 2024.
Alpesh Paleja: It’s clear by now that inflation is going to rise further, thus the risk of it becoming embedded in domestic price and wage setting is higher. The Bank’s signals on future monetary policy — Ie a few rate rises to come beyond December and a strategy for “quantitative tightening” — are welcome, and at this stage seem sufficient to get price pressures under control.
But the risks to inflation are very much to the upside, even after the emergence of the Omicron variant. Indeed, this could actually exacerbate price pressures, through stoking supply chain disruption and further skewing global demand towards goods (at the expense of consumer services). If it materially dampens domestic demand too, it might leave the Monetary Policy Committee walking something of a tightrope when it comes to monetary policy.
Ann Pettifor: The extent to which central banks are ever ‘in control’ of inflation is much exaggerated, save where they choose tight monetary policy to engineer recessions via mass unemployment — as in the 1980s. The factors underlying current inflation are mainly outside central banks’ monetary policy toolkit control. We think CPI inflation will remain well above 3 per cent in 2022 but will fall back in the latter part of the year. House price inflation is due to wider global financial market excesses — which central banks decline to constrain. As in previous instances, financial markets will panic in the face of tightening monetary policy and central banks will likely ease again.
John Philpott: CPI inflation will remain stubbornly well above target albeit easing from a likely high peak in the spring as post-pandemic supply bottlenecks improve and successive interest rate rises take effect. The Bank will feel confident that it is taking sufficient action but remain under pressure to demonstrate it is doing enough to return inflation to target within a reasonable timeframe.
Kallum Pickering: Rising inflation expectations — which are feeding into wage growth — point to a more persistent inflation dynamic than the Bank of England had initially presumed. With continued gradual rate hikes and the start of a passive balance sheet unwind, inflation should begin to turn down over the course of the year after peaking in Spring. However, while the temporary imbalance of strong demand and global supply dislocations should ease somewhat in 2022, inflation will likely remain close to 3 per cent by year-end. That is, still well above the Bank of England’s 2 per cent target rate.
Christopher Pissarides: I very much doubt it because the current inflation is not a monetary phenomenon. The Governor in his interview after the last meeting seemed to be interpreting it as such, which puzzled me. To me, the biggest impact on prices seems to be an adjustment in relative prices which has to take its course and I wished they left the economy alone to take care of it.
Ian Plenderleith: The balancing act — requiring graduated tightening to push back moderately against inflationary pressures without totally flattening growth — will need to continue and it will be hard to judge at any given moment whether the right balance has been struck. But that’s inherent in conducting policy. I would expect to continue to feel that the Bank is in reasonable control, but there will be plenty who will disagree. That, too, is inherent in conducting policy.
Richard Portes: Bank of England doesn’t ‘control’ inflation, at least not in a period of major supply-side disruptions. Those will ease and core inflation will fall substantially in 2022, but not because of monetary policy.
Jonathan Portes: The key factors driving inflation higher are energy prices and supply chain issues associated with the reopening. There is as yet little or no evidence of a “wage-price spiral” or persistent excess demand for goods and services. So I would expect inflation to fall quite sharply over the course of the year.
Vicky Pryce: Inflation is likely to still be above target- and handsomely so, by end 2022. But it will remain very difficult for the Bank of England to control inflation through its actions as many of the pressures are global, namely energy prices and supply and staff constraints which may ease but are unlikely to disappear. Brexit of course is also adding a further dimension to the inflationary pressures the UK is facing. But frankly, there is no way that any central bank can really be in control of inflation in the short to medium term at this stage of the global cycle unless their combined actions- and those of the fiscal authorities, bring the world recovery to a halt and energy and other commodity prices ease- maybe even collapse. Indeed the impact of the Omicron variant-and other variants that follow, is much more likely to be a determinant of world and UK inflation than any action by the Bank of England. That is unless of course Bank of England raises interest rates dramatically and /or massively reverses QE. This would drain the economy of funds and also raise sterling which would bring inflation down somewhat but it would also stop recovery in its tracks which I don’t think many would recommend and would certainly be the wrong thing to do. I suspect we will have to accept that above target inflation is something we will have to live with for a while.
Thomas Pugh: Inflation will stay at around 5 per cent until April when it will peak at between 5.5 per cent and 6 per cent. However, the surge in inflation is being driven by energy, fuel and pandemic-afflicted goods prices, such as used cars. We estimate that energy, vehicle fuel and car purchases accounted for about 40 per cent of inflation in November, despite making up just 10 per cent of consumer spending. There’s not much sign of widespread domestically generated inflation in the services sector.
After it peaks, inflation will remain high through the first half of 2022. It should then fall sharply in the second half of the year as the recent surge in energy prices falls out of the annual comparison. Our base case is that inflation will be around 2.5 per cent by the end of 2022, and fall to 2 per cent in early 2023.
Of course, there is a risk that energy prices will continue to rise over the winter or that supply chain pressures will take longer to resolve than we think. If that’s the case, inflation may peak a bit higher and take a bit longer to fall than we think.
However, there is also a risk that inflation will significantly undershoot. Commodity futures markets point to falls in the prices of energy commodities — if gas and electricity prices fall by 20 per cent and used car prices return to normal by the middle of 2022, inflation could drop to around 1.5 per cent in 2023.
Sonali Punhani: No we don’t think the Bank of England can get inflation back to target next year, unless the Bank of England overtightens aggressively and chokes the recovery. In our base case, we expect a gentle hiking cycle with the Bank of England raising rates twice in 2022.
The pass-through of rising rates to consumer finances has reduced over the past year, given the high prevalence of fixed rate mortgages. These rate hikes should reduce demand to some extent, which could alleviate some wage/ inflationary pressures in the economy.
But this is unlikely to get inflation back to target by end of 2022. The rise in inflation has been driven up by energy prices and supply side constraints, factors less likely to be affected by monetary policy. Also, monetary policy acts with a lag. We do expect inflation to fall from the highs in H2 2022 as supply side issues and energy prices subside, though it is likely that above target inflation persists throughout 2022. Moreover, we think Brexit is likely to pose a permanent drop in labour supply, which should keep the labour market tight and wage pressures to persist next year.
Morten Ravn: Bank of England will be reluctant to raise the policy rate as long as the economy is still recovering from the pandemic/Brexit. It does have the ammunition but will probably be willing to let inflation go above its target for a while.
Ricardo Reis: It will be a difficult challenge, but relative to the Fed and the ECB, the Bank seems more in control. It has been faster to acknowledge the inflation problem and the trade-offs involved, as well as in getting policies ready to respond. It seems more ahead of the curve than its counterparty on the other side of the Atlantic.
Phil Rush: Inflation seems set to remain well above target throughout 2022, barring a collapse in commodity prices. However, the excess should have moderated to more comfortable levels by the end of that year, with the outlook no longer appearing threatening.
Holger Schmieding: Inflation will decelerate significantly over the course of 2022, but remain well above the Bank of England’s 2 per cent target in 2022 and 2023. In this sense, the Bank of England will not manage to bring inflation fully back under control.
Yael Selfin: Inflation is expected to start moderating gradually from Spring 2022 but is unlikely to reach the Bank of England’s target before the end of 2023.
Key will be to manage inflation expectations, which the relatively bold move by the Monetary Policy Committee in December should begin to address.
Andrew Sentence: Not sure the Bank of England will be “in control” of inflation but it should subside after a peak in the Spring. I would project 3-4 per cent inflation by the end of the year — still significantly above target.
Philip Shaw: High inflation in product markets should ease as factors such as component shortages and logistical issues are resolved, although it is very hard to put anything like a precise timescale on this. Energy prices are even more of a wild card. A general and perhaps slightly obvious point is that prices of goods and commodities do not actually have to decline for inflation to flatten out — even a moderation of recent price increases achieves this, and this is a prospect that seems likely at least at some stage in 2022.
A more lasting threat to the inflation outlook is a generalised increase in pay growth that sparks off a feedback loop into high street prices. Labour mobility appears to be lower in a number of economies since the pandemic and in the UK specifically, Brexit related issues seem to have heightened labour shortages in various sectors. These shifts in labour supply/demand dynamics could result in the start of a sustained pick up in pay growth.
A recovery in the supply of goods and/or commodities might mean that Inflation ends 2022 at or close to its 2 per cent target, but this would largely reflect post-pandemic adjustments in the global economy and it would be misplaced to ascribe such a moderation in price pressures to greater Bank of England control. The key issue lies further ahead. This is the risk that we may now looking at a less favourable trade-off between measures of labour market slack and wage growth which would make it more difficult for the Bank of England to set policy, especially as the nature of this relationship is uncertain.
Andrew Simms: The Bank of England can influence but not fully control inflation. But, this matters less than it might appear for two reasons: firstly, fears of inflation are typically exaggerated and secondly, several other overdue shifts in the UK economy could guard against it and ensure that the more vulnerable in society are protected from its effects.
The products attributed with contributing to the recent rise in inflation are petrol prices, food prices, and clothing and footwear. Where petrol prices are concerned this should, at least, be a very short term problem. Climate targets, air quality concerns and insulating the economy from fuel price shocks are all reasons to move rapidly beyond the UK’s current dependence on petrol as a major transport fuel. Fortunately, although late and delayed by manufacturers, the shift to full electric vehicles is finally accelerating, though from a low base. But, in terms of impacts, many of the poorest households don’t even own cars and in big cities like London, the majority, 60 per cent live car free, or use cars for short journeys easily done in other ways.
The long shadow of Brexit still hangs over retail prices with problems of supply, administration and distribution, such as driver shortages. It’s possible to see some of these being increasingly worked around. But again, there is a risk of seeing the issue in isolation from real world problems. Cheap, fast fashion, for example, is heavily linked to the exploitation of workforces, huge volumes of waste and ecological damage. Any effective response to this speaks also to the issue of price — we should be consuming less of such products and making them last longer — shifting to a consumer culture that embraces greater agency in terms of care and repair, and business models based on the circular. Connected but different dynamics relate to the food issue — where there is also enormous waste. In terms of the share of income spent on food, today’s prices are historically very low. But for people living in food poverty, any price rises are harsh, and this is where a more meaningful ‘levelling-up’ agenda matters more. A shift to a more sustainable food and farming culture is something that anti-poverty, climate and farming campaigners agree on.
This may all seem very far from the Bank of England’s direct responsibility and control, except that both working alone, and in collaboration with the Treasury, there are many ways in which, the Bank of England could both be more in control of inflation where it matters (such as its effects on low income households, or in potentially making more environmentally sustainable choices harder) — and help to propel other needed shifts in the economy.
For example, the Bank has an increasingly sophisticated take on the ‘financial risks and economic consequences’ of the climate emergency and how these matter for the Bank’s ‘mission to maintain monetary and financial stability.’ An obvious risk mitigation strategy is for central banks to act to raise the cost of capital to polluting, high carbon activities and make it cheaper for clean, green economic activity central to rapid, low carbon transition. I’ve argued elsewhere that this means we need ‘ecological interest rates’ to deliver that. There is a need for a huge expansion in the availability of climate friendly goods and services. The challenge for the Bank, from an inflation-control point of view, is ensuring sufficient economic stimulus to make them available (given inflation results from too much money chasing too few goods). For this the Bank could also experiment more with its second tool of monetary policy, making more targeted use of QE, for example by helping to capitalise the new National Infrastructure Bank if it is given an explicit role to finance low carbon sectors. In tandem, the Treasury should also act on the Climate Change Committee’s recommendation on the ‘phaseout of inefficient fossil fuel subsidies’ by reviewing the role of tax policy.
Nina Skero: Omicron and inflation are the two biggest uncertainties that will impact 2022 outlook.
We expect inflation on the CPI measure to be around 3.5 per cent at the end of 2022, which would mean that supply chain and wage pressures have largely subsided, and that the Bank of England has the non-transitory factors relatively under control. We do expect that at least two further rate rises and a reduction in asset purchases will be necessary to achieve this.
However, there are three considerations to keep in mind regarding this forecast; 1) the bands of uncertainty are significant and much higher inflation rates are a very real possibility 2) even at 3.5 per cent inflation will be well above target and not forecast to drop to 2 per cent until early 2024 and 3) the inflation data at the moment doesn’t seem to be capturing the extent of price rises observed anecdotally meaning impacts on consumers and businesses could be greater than what is implied by the official figure.
James Smith: UK inflation is likely to be noticeably lower in twelve months time. While headline CPI is set to peak well above 5 per cent in the spring, recent upside surprises have been predominantly been driven by the same components — energy and cars. Neither are in the Bank’s control, and both are likely to stage some degree of mean-reversion, and we’ll see early signs of this in 2022. Headline inflation is likely to be below target, perhaps noticeably so, by spring 2023. That’s not to say the Bank shouldn’t hike rates. The time for emergency policy is probably over. Wage growth — which is ultimately the one thing that matters most for the Bank of England — seems to be consistent with pre-virus levels. But falling rates of headline inflation next year are one of the reasons why the Bank doesn’t need to hike aggressively in the early stages of 2022.
Andrew Smith: At the moment, it’s out of their hands. Inflation is currently being driven largely by rising international energy and commodity prices which will be unaffected by higher UK interest rates. The only way the Bank of England’s tightening would make sense would be to avert higher prices from fuelling a wage spiral — but, contrary to press speculation that higher wages for lorry drivers would lead to generalised pay increases, real earnings are stagnating across the economy as a whole. The Bank can only keep its fingers crossed that international price pressures will subside — but in the meantime, higher rates risk damaging further already poor growth prospects.
Andrew Smithers: None. The lag between policy and outcome means that the mistake on QE cannot be rectified in 2022.
Alfie Stirling: On the downside, the Bank of England has not been in control of inflation for over a decade now. This is because interest rates have been at or around their effective zero bound — the point at which further cuts have negligible or uncertain reflationary effects — and quantitative easing is a poor substitute for directly stimulating the economy.
On the inflation upside, the Bank also finds itself constrained at the moment. The current drivers of inflation are global, so the Bank cannot tackle these directly through policy. It can attempt to offset — rather than address — cost push factors by dampening domestic demand through higher interest rates. But inherent weaknesses in the UK economy, and the continuing uncertainty over the pandemic means the Bank doesn’t have much room to manoeuvre here either, before coming up against sharp and potentially intolerable trade-offs with the wider domestic recovery.
For the Bank to retain some sort of meaningful, albeit indirect, control over inflation on the upside by the end of the year, the Chancellor will need to have done much more on active fiscal policy than currently planned to secure the recovery.
If the question is less about control, per se, and more about whether inflation has returned to target (whatever the reason), then I expect some global drivers of inflation to have subsided by the end of next year and for UK inflation to be closer to the 2 per cent than it is currently, albeit still some way off.
Gary Styles: Inflation is likely to be well ahead of target throughout 2022 and into 2023. I would expect inflation expectations to moderate considerably by the end of 2022 but significant upside inflation risks remain.
Suren Thiru: Inflationary pressures are likely to intensify in the near term as the rising cost of imported raw materials, higher energy prices and the reversal of the VAT reduction for hospitality and tourism drives inflation above 6 per cent by the middle of the year.
Omicron could accelerate the current surge in inflation if restrictions in the UK and overseas to combat the new variant trigger more supply chain disruption.
If the current global supply chain disruption eases in the second half of 2022, inflation should drift back to the Bank of England’s 2 per cent target by late 2023. While further interest rate rises are likely this year, with the current inflationary spike mostly driven by global factors, tightening monetary policy will do little to limit further increases in inflation.
Phil Thornton: In control. Inflation will peak in the spring following the restoration of the VAT rate for the hospitality sector and another big rise in the energy price cap. But then base effects — and the likelihood that the Monetary Policy Committee will follow through on December’s rate hike with further tightening — will bring it back close to target by end-2022
Samuel Tombs: CPI inflation will peak at about 6 per cent in April and probably will ease only to about 3 per cent by the end of the year, regardless of the Bank of England’s actions. High inflation, however, primarily will reflect the recent surge in energy prices, which implies that Ofgem will increase its default tariff price cap by about 40 per cent in April, and a further 7 per cent or so in October. Domestically-generated inflation likely will remain at levels broadly consistent with the headline rate returning to the 2 per cent target in the medium term. The recent cooling of wage growth suggests that workers’ bargaining power has not been greatly enhanced by the recent tightening of the labour market.
Kitty Ussher: The Bank will not have achieved its 2 per cent inflation target by the end of 2022, but it will have reduced the risk of a future persistent overshooting through a greater understanding of what it needs to do to bring inflationary expectations down in a post-pandemic world.
This improved understanding will be achieved through several calibrated rate rises in the first half of 2022.
John Van Reenen: I expect some subsidence by the end of the year in the inflationary pressures which will peak next year. It will still be above target, but Bank should not panic and move to increasing rates too early.
David Vines: I expect the Bank of England to remain in control of inflation. I still expect the inflationary spike to be largely temporary. Paul Krugman and Hyun Shin (of the BIS) have explained reasons; they see the spike as resulting from the reallocation of demand, and from supply chain difficulties, the effects of both of which are likely to be transient. I do not yet see evidence that there will be a significant uptick in wage settlements. This is mainly because I think that, quite unlike in the 1970s, there is still a strongly embedded expectation of low inflation. Nevertheless, I expect to see inflation remain at between 3 and 4 per cent for between two and three years. I expect the Bank of England to be able to maintain an expectation of low inflation, even in the presence of this moderate inflation, and I expect this to be possible even if real interest rates do not move into positive territory.
Sushil Wadhwani: The Bank of England will be tested in 2022. When I was on the Monetary Policy Committee, we were lucky in that we benefited from favourable supply shocks. Setting appropriate monetary policy in the face of unfavourable supply shocks with some signs that inflation expectations are being dislodged is an unenviable task. With all the uncertainties around what is happening with regard to the pandemic and the difficulties in assessing the true state of inflation expectations, the Monetary Policy Committee is going to need to be exceptionally lucky to achieve the desired “Goldilocks outcome”.
Martin Weale: Inflation is likely to be still above target at the end of the year but it will probably be falling.
Simon Wells: Medium-term inflation expectations seem to remain fairly well anchored, which bodes well. But near-term inflation will remain a hostage to global energy prices and supply disruption, as well as the impact of Omicron, which the Bank of England can’t do much about.
Peter Westaway: Inflation is starting the year a long way above target and will gradually return towards but not to target by end-year. It is unfair to blame the Monetary Policy Committee for inflation increasing due to factors beyond their control. But the erosion of living standards caused by high headline inflation will mean that the Bank will struggle to bring inflation back under control. They will be fighting an upward drift in inflation expectations. And real wage resistance raises the chance of the first wage-price spiral that we have seen for many years.
Michael Wickens: The Monetary Policy Committee won’t have inflation under control if they maintain their current stance. The Bank sees current price rises as supply shocks and ignores them as it thinks they are a temporary relative price change which should be accommodated and not a demand shock to be controlled by interest rates. Unlike in the past, the Monetary Policy Committee lacks monetary economists on it.
Trevor Williams: The Bank of England cannot control inflation driven by a global supply-side shock. Only a more open and global recovery in supply can do that and the year on year effects abate a shift up in the level of inflation from the supply side shock.
Stephen Wright: Bringing inflation back down quickly while relative prices of some key inputs rise (which it seems likely they must) requires relative prices of other key inputs to fall. In 2008-10 this was manageable since falls in real wages achieved the balancing act. This looks a lot less likely now. So things could quite easily get quite nasty.
(The Bank of England has arguably had a relatively smooth ride since independence, because we have mostly had demand shocks, hence no conflict between output and inflation stabilisation. For a while covid looked like nearly-offsetting demand and supply shocks, but it is now starting to look much more clearly like the latter.)
Linda Yueh: With a continued focus on inflation expectations, the Bank of England is likely to do so. The rise in core inflation, excluding volatile items such as energy and food, has been rising, so this management of expectations will be more important in 2022.
To what extent will the UK look like a high wage, high productivity economy at the end of 2022 — and will people feel better or worse off than they do now?
Melanie Baker: The UK economy will make progress towards this if labour markets remain tight, but the UK’s productivity problem needs a multiyear and multipronged policy effort to fully address. So far, the prospects are not good for people feeling better off by the end of 2022. Inflation is likely to rise before it falls and pay growth is unlikely to keep up for much of the year. The year already looks set to start off poorly for any households working in sectors hard hit by Covid and with no furlough scheme in place to support lost earnings.
Kate Barker: Far too soon to see this switch — the key to watch will be business investment which could recover strongly and start the move to higher productivity. People are likely to feel worse off — the higher costs of healthcare have to be met.
Nicholas Barr: Not least because of pandemic-related structural adjustments, productivity growth will slow, hence also real wage growth. If that is the case, people are unlikely to feel better off, at least in material terms, though there might be a boost in subjective well being if the impact of the pandemic attenuates.
Ray Barrell: The UK was a high wage, high productivity economy at the end of 2021, at least by global standards. It will remain a high wage, high productivity economy at the end of 2022. The self-harm from Brexit and the impacts of Covid will mean people will probably have lower living standards at the end of 2022 than at the end of 2021. The UK will continue to slip behind France, Germany, the US and others over the next decade unless policies change dramatically.
Martin Beck: The pandemic and the policy response, along with some of the after-effects of Brexit, have triggered shifts that could promote a higher wage, higher-productivity economy. On a micro-level, these include efficiency gains from more homeworking and increased online activity. On a macro level, political support for the kind of growth-sapping fiscal austerity which did so much damage to the economic recovery in the 2010s is firmly out of fashion. The outcome should be a higher-pressure economy, which could give firms more confidence to invest and workers more confidence to demand higher wages. Meanwhile, reshoring related to Brexit and domestic production substituting for goods previously imported from the EU should also be investment positive and be another force making for a ‘hotter’ economy. However, the wage and productivity effects of these developments will take time to materialise and are unlikely to be evident by the end of this year. In terms of perceptions, high inflation in the first half of this year means people will probably feel worse off in income terms when 2022 draws to a close. But households will probably still retain some of the massive unplanned savings accumulated during the pandemic, while we think housing wealth will continue to rise in value in 2022. So in wealth terms, those households fortunate enough to hold financial and housing assets should end 2022 feeling flush.
David Bell: Much worse off — general inflation will exceed wage growth (see my previous answer). Energy prices will grow faster than prices in general. Given that the poor spend a larger proportion of their income on energy, the standard of living crisis will be most acute for this group, many of whom have also experienced a cut in universal credit.
Philip Booth: It will certainly not look like a high productivity, high wage economy whilst the government continues with the current policies of increasing taxes and regulation. We are losing the benefits of freedom of movement and the single market without any corresponding benefit of reductions in domestic regulation.
Nick Bosanquet: the UK is already 15 per cent below OECD high performers for real income and productivity. The gap will worsen over 2022 and beyond.
65 per cent . . . owner-occupiers in stable jobs….. will still feel secure, neither worse nor better: but there will be severe problems for 35 per cent of households living in a rented property and faced with rising living costs—for food, energy, transport. The Tax data for the furlough period showed that higher earners continued to pay more tax while tax payments for lower incomes fell. The UK is already one of the most unequal developed economies — the poorest 20 per cent had 6.7 per cent of total income: . . . this share will decline further bringing about social tensions and intergenerational differences with further declines in income and owner-occupation for children in low income households.
Erik Britton: Compared to most other economies, the UK is a high-wage, high-productivity economy. Compared, however, to its peers and to its own past, the growth in productivity and wages in the UK is pretty awful. That is unlikely to change. People will be better off but will feel worse off than they might have been, or might have expected to be.
Jagjit Chadha: The end of 2022 is far too short a horizon to shift the bad equilibrium of a low wage-high employment-low productivity economy into the one we all want. We have ended up in a world of low levels of capital per worker as part of a 30-year process of relatively low levels of investment. This leaves the economy vulnerable to shocks and will mean that the median family is unlikely to feel much better off materially by the end of 2022. But if the Covid crisis is behind us and there is full employment that may be an acceptable outcome relative to many other alternatives.
Victoria Clarke: We expect the imbalance between the supply and demand for UK workers to persist through 2022, continuing to bid up wage awards, with high inflation persuading workers to seek bigger pay settlements. But, anticipating that CPI inflation will average more than 4.5 per cent through 2022, we are doubtful that pay growth will keep pace. We expect the squeeze on household living standards to be particularly acute in the first half of 2022, helping to keep the Bank of England focused on the need to limit the risk that households face persistently high inflation in years to come.
David Cobham: No chance of looking like (let alone being like) a high wage, high productivity, economy, partly because such transformations take a long time but partly also because the government is doing little to bring it about. And people will feel worse off because wage rises won’t offset inflation, while employment will remain for many precarious.
Brian Coulton: It will take years of strong investment growth to make such a transformation. We may be seeing upward pressure on wages in lower-paid jobs at the moment as the service sector reopens and worker shortages in leisure and transportation bite, but these are likely to be one off pandemic related moves. High inflation will eat heavily into real wage growth and will affect lower income groups more adversely.
Diane Coyle: Most people will feel worse off in a year’s time. Pay growth is unlikely to keep pace with inflation, especially for those on lower incomes (because food and energy prices are rising so fast). Public services will feel like they’re deteriorating again because funding isn’t keeping pace with need. Productivity improvements will take sustained policy changes and quite a long time to work through to living standards.
Let’s hope for a post-pandemic boom — finally. It’s the phenomenon most likely to see 2022 end on an optimistic note. Let’s hope we’re post-pandemic by then.
Bronwyn Curtis: Higher wages usually stimulate higher investment by companies to offset the labour scarcity and the increase in costs. This would change the way UK companies run their businesses as they have relied on easy access to a supply of migrant workers in the past. Brexit has changed that, but it takes time for companies to make the necessary investments in capex to create a high productivity economy. That won’t happen by the end of 2022.
Higher wages are likely as strong household balance sheets will lead to a surge in spending in 2022 creating more labour shortages.
Household balance sheets are very strong and most have locked in low fixed rate mortgages, so higher rates will have little impact. Wages will rise further, and even if inflation is higher than they are used to, they will still be, and feel better off.
Paul Dales: The UK will look no more like a high wage, high productivity economy than it does now. This is more a political slogan than an economic policy.
The positive point is that we think the unemployment rate will have fallen from 4.2 per cent in October to below 4.0 per cent by the end of the year. So more people will be working and earning. But high inflation in the first half of 2022 and the tax rises in April 2022 will make people feel as though they have less money in their pockets.
Richard Davies: It won’t. The UK switched, for reasons economists don’t fully understand, to a model in which the growth of both productivity and real wages are low, both compared to the UK’s own (pre-2008) history and other G7 countries. Over the course of the next year, it looks likely that inflation will outpace wage growth so that real wages — the purchasing power of pay — will decline for the median Briton.
Howard Davies: A decline in purchasing power is baked in already, with inflation ahead of (most) wage increases and the new social care levy will kick in.
Melissa Davis: This is unlikely. Wage growth is decelerating back towards more ‘normal’ levels and the labour market should loosen up next year as mismatch eases, overseas workers return and employers trade-off furlough volumes against wage settlements. Productivity should improve if companies invest more, particularly in digital and greening. They have the cash to do this and surveys are optimistic on the outlook. But there is no straight line between productivity growth and wage inflation, the benefits can easily accrue unevenly towards profits.
Paul De Grauwe: High wage and high productivity are linked together in the long run. Nothing of this will be visible at the end of 2022.
Panicos Demetriades: I cannot see how the UK will turn itself into a high wage, high productivity economy in 2022 under the current government. Long-term structural reforms are challenging in the best of times. With the current government, which appears to be serving special interests, rather than the public interest, that is an even bigger ask.
Policy decisions around Brexit but also around the management of the pandemic have been haphazard and have only added to Brexit related uncertainty that has damped investment and caused many companies to abandon or disinvest in the UK.
The UK is now lacking competent government and direction, something that came automatically as a member of the EU, as the Union has a clear long run vision and long term planning in place that is addressing the challenges of the day, including climate change, productivity etc, sensibly, competently and systematically.
Living standards are already falling and will continue to do so due to the negative shocks from the Pandemic, with all the supply and inflation shocks, but also due to the effects of Brexit on the economy.
The Bank of England cannot produce miracles — neither is it responsible for the supply shocks or the way in which the current government has managed Brexit — badly — or the pandemic — slow to act and then better with the risks it took with the vaccination programme that paid off.
Wouter Den Haan: The UK economy has been characterised by low productivity growth for more than a decade. There are no reasons to support the view that the UK economy is on a path towards long-term high productivity. The idea that the UK economy would suddenly obtain high productivity levels seems ludicrous.
Swati Dhingra: Very unlikely, structural problems would make this unrealistic even without the added pressures from Covid and Brexit.
Charles Dumas: It likely will take longer than one year to reach this happy end game, and a lot could go wrong in between. Economies across the globe have lost migrant labour during the pandemic, but those developments were amplified in the UK, thanks to Brexit. A level shift in low-skill wages and probably wages in general is likely under way. This is difficult for businesses in the short-run but could help to place consumer demand on a more sustainable path over the longer term, with consumption driven by income rather than reliant on debt.
Wage and productivity trends are intimately related, with global evidence (gathered by our Global Macro MD, Dario Perkins) that periods of overheating can generate higher productivity growth. Continual truncation of the wage cycle by policy, and reliance by businesses on cheaper labour from abroad could have left the UK in a negative equilibrium between cool labour markets and therefore little need for investment. Removing the crutch of cheaper labour could spur investment. The problem at this stage is that uncertainty around Brexit and now Covid for some sectors has hampered investment. At the same time, policymakers appear less willing in the UK to countenance that overheating, with the Bank of England seemingly eager to prove its inflation taming credentials.
All this will play out over a much longer timeframe than just 2022. But by the end of 2022, people could well feel less well off, if Omicron induces a period of voluntary or government restricted movement; the government is less likely to be generous in this round of Covid, partly leaving people to rely on any buffers built up over previous rounds. Nevertheless, parts of the household sector could be more positive as wages continue to adjust. At the same time, headline inflation should be tracking lower again, led by goods prices.
Wohlmann Evan: The challenges to the UK’s growth potential — weak productivity and challenging demographics — will continue to act as a headwind to economic growth and real incomes in the coming years, particularly if there was to be a protracted reconfiguring of the economy coming out of the pandemic. Furthermore, high inflation, high energy bills and planned tax rises will erode household purchasing power, putting pressure on the government to provide additional fiscal support to households in order to alleviate increases in the cost of living. Brexit-related uncertainty, particularly as the agreement with the EU largely lacks substance on services trade and leaves many issues left unsettled, will continue to act as a headwind to private investment. UK exporters also now face significant non-tariff barriers in trading with the EU, and new trade deals with non-EU countries will not have a material positive impact on the overall cost arising from Brexit. Work-related immigration flows from the EU have fallen significantly since the 2016 Brexit referendum and have only been partially offset by greater inflows from the rest of the world. We expect lower net inward migration flows over the longer term will slow growth in the labour force and intensify the negative impact of population ageing and weak productivity growth. Lower availability of labour will take time to translate into productivity gains and will depend on higher capital investment and upskilling of the population.
Noble Francis: During the first half of the year, households will feel the direct hit of rising energy bills, as well as the indirect impact of energy costs, rises as they feed through the rest of the economy, particularly in energy-intensive industries. As a result, households will feel worse off despite nominal wage increases, sometimes significant ones in occupations in which there are significant skills shortages. In terms of UK productivity, business investment will be key. It fell sharply in 2020 and despite a partial recovery in 2021 Q3 it remained one-fifth lower than pre-pandemic and pre-Brexit. Persistent supply-side issues and the Chancellor’s ‘super-deduction’ will stimulate UK business investment this year from a low base but the impacts of these large upfront investments for a long-term rate of return on UK economic activity and productivity will not be seen by the end of 2022.
Former senior official: Their feelings will be as much driven by the course of the pandemic as by real wages. I think real wages will fall year on year but if “normal life” is back by next summer consumer sentiment should bounce.
Andrew Goodwin: I suspect that productivity will improve in 2022, but that it will largely reflect some of the lost ground of the past couple of years being recovered. There is no sign of any government plan to drive up productivity, so it’s hard to see the UK doing anything other than continuing to drift over the next few years.
2022 does promise to be a tougher year for UK households — though inflation will come down as we move through the year, households face some significant tax rises and we’re not convinced that wage growth is going to accelerate enough to offset these headwinds.
Andrew Hilton: Oh God . . . where do you get these questions? It seems most unlikely (unless there is divine intervention) that we will be a ‘high productivity economy’ within 12 months. It doesn’t work like that, madam. As for high wages . . . yeah, we are really starting to see wage pressures in both public and private sectors. Will people feel better off? That depends on a lot more than inflation — eg the gloom provoked by fear of incessant lockdowns.
Dawn Holland: The end of 2022 is far too early to expect changes of this magnitude.
Paul Hollingsworth: A transformation of the UK economy to a high wage and high productivity one by the end of 2022 looks unlikely. While the outlook for investment growth looks positive, and wage gains are likely to materialise, such a transformation is a multiyear process and in the short term high inflation and both monetary and fiscal tightening is likely to weigh on perceptions.
Ethan Ilzetzki: The UK will not become a “high wage, high productivity” economy in a year. I expect both wages and productivity to be higher at the end of the year, but I view the question as suggesting whether the economy will be on the path to sustained wage and productivity growth. This is a generational challenge, requiring upgrading of the workforce’s skills. There is broad consensus on this matter, as can be seen in the Centre for Macroeconomics’ survey from last month: https://cfmsurvey.org/surveys/towards-high-wage-high-productivity-economy.
Whether people feel better or worse off will largely depend on the state of the pandemic recovery, which is too uncertain at the moment to predict.
Dave Innes: Labour shortages are not a short-cut to a high wage, high productivity economy. If the UK’s productivity malaise is to be treated, it will require time. The ‘levelling up’ agenda currently doesn’t show any signs of developing into a coherent strategy to raise productivity in lagging regions, while the Plan for Growth identified some of the right areas for action but has not yet invested enough, especially in skills.
2022 will not be a good year for living standards, with another year of stagnant real wages, and incomes also hit by a rise in National Insurance Contributions. Low-wage workers will be some of the few to see real wage rises with the minimum wage going up faster than inflation. But changes to universal credit mean few will feel any better off. Meanwhile, millions of people unable to work because of illness or disability now have the lowest main rate of out-of-work support in real terms since around 1990. For many, 2022 will be a year of financial hardship.
Dhaval Joshi: My sense is that we are moving to a LOW wage, high productivity economy.
Recessions are a catalyst to embrace new technologies and ways of working and living. For example, one legacy of the pandemic recession is that hybrid office/homeworking will now be the norm. In this regard, I would expect productivity to spike higher, even though it may take time to get measured properly.
The question then is: who will glean the benefits of this higher productivity, wages or profits? My inclination is that with the ongoing competition from automation and remote-technologies, profits will get the lion’s share.
Nevertheless, at the end of 2022, people will feel better off than they do now, because inflation will cool, (as per my answer to the question on inflation) and thereby boost wages in real terms.
Deanne Julius: Both average wages and productivity will rise during 2022 but not to the level that they would be considered ‘high’ relative to other developed countries. If the wage gains are mostly among the lower paid — which is where current shortages are — then many people will feel better off than they do now.
Saleheen Jumana: It is well known that the level of productivity in the UK is lower than most of its OECD counterparts. The UK Government is keen to transform the UK into a high wage, high productivity economy, but that cannot be achieved in a short period of time. Raising productivity is a long game, it will take decades rather than years. It requires a prolonged period of innovation and investment in capital, technology and labour market skills.
How people feel about their living standards by the end of 2022 will depend on the evolution of their real wages and incomes. I expect real disposable income and wages of the ‘average’ worker to grow during 2022 — which will make people better off. (Worth noting that there is a large amount of variation around the average: many workers will be worse off).
Whether or not the average worker feels better or worse, depends on the extent to which they experience rational inattention. Rational inattention occurs when people cannot absorb all the available information but choose to process certain pieces of information. People may feel worse, for example, if they focus on the elevated levels of inflation and expectations of rising interest rates.
Lena Komileva: While the pandemic has ushered in structural changes in the way we work, consume and produce, which may benefit productivity growth over the long run, much depends on support from productive public sector reforms and investment, particularly with respect to green and trade infrastructure. In 2022, the risk is that high inflation and negative fiscal multipliers will prevent any meaningful recovery in UK real net national disposable income per capita.
Barret Kupelian: Having said that, there is no evidence of productivity growth happening in the UK economy. Nor is there a real plan to make sure that this happens in the future. The UK doesn’t have a formally adopted industrial strategy, there is no strategy with regards to the services sector of the UK and, at the same time, the UK continues to renegotiate its relationships with its trading partners but seems to ignore its relationship with its closest and largest trading partner. Until these relationships are seriously taken into account, I cannot see the UK progressing to a high wage-high productivity model.
Ruth Lea: Given high inflation and increased taxes, real disposable could well fall and people will feel worse off. Wage levels & productivity levels are unlikely to be materially different from the present.
John Llewellyn: Economies do not get transformed in one year. It would take ten years of assiduous application of supply side policies to effect even a modest transformation of the UK economy. This has been done — Germany, Australia, New Zealand are three examples — but it takes political leadership and determination, and broad public acceptance. None is currently in evidence.
Gerard Lyons: I would not have described the UK as a high wage, high productive economy at any time over the last quarter of a century, so it would be some achievement if that was to change during 2022. But as we emerge from the pandemic, there is a great opportunity to outline and deliver upon a pro-growth economic strategy, and it requires that to set the seeds for the high productive, high wage economy that is needed.
As to whether people will feel better or worse off, I think the answer will show significant variation, both across the economy and through the course of 2022. That is, it will likely mirror an unbalanced economy. Significant asset price inflation including higher house prices, alongside rising wages and high savings, may make some people feel well off. Overall, though, I would expect the majority of people to feel worse off, particularly during the first half of the year, because of higher inflation and rising costs. This will feed higher wages.
Steve Machin: There is too much in need of change to even think of a high wage, high productivity economy in that time window. Even if such longer run factors that have caused the current real wage and productivity problems that the economy currently faces start to be addressed the time window to get living standards rising again like they used to is not end of 2022.
Christopher Martin: The UK is a prosperous country but the likelihood of marked increases in real wages that are driven by high productivity growth is low. UK investment since 2016 has been sluggish and the UK has not built the base of worker skills that would be required for this.
David Meenagh: Productivity and wages should continue to grow in 2022, though wages probably won’t grow as fast as prices.
Costas Milas: Slightly better but high wages come mainly through higher productivity (the latter relying on additional investments).
Patrick Minford: Like all developed economies the UK is a mixture. What distinguishes it from most EU economies is high employment, so that there is a large group of low-paid, low productivity workers drawn into employment- this lowers average productivity but is healthy.
Andrew Mountford: The question is confounding as it mixes up short term and long term issues. Whether people will feel better off at the end of the year will depend on how the current labour market plays out, with the major forces being the pandemic, falling participation, increased inflation, and labour shortages in some areas. Some may gain but I think inflation will probably erode most of the nominal wage growth. The high wage, high productivity economy is something that will be determined in the long run and will result from education and training policy, investment and technology policy, migration and trade policy as well of course from labour market policies. I think most people want to create an economy with ‘Good Jobs’ but policies for creating them are not straightforward and will differ from sector to sector.
John Muellbauer: No chance of that. Fixing the UK’s productivity problem is a task of 5 to 10 years and one sees little of the holistic, transformative policies that will be required. Feeling worse off isn’t just a question of comparing average consumer spending adjusted by the CPI. It is also affected by health, public service delivery, inequality and hope for the future. I expect an even higher proportion of people to feel worse off in December 2022. But much depends on the course of the pandemic and the emergence of new variants.
Andrew Oswald: (i) Neither more nor less than today. (ii) For the average citizen, I expect them to feel the same as today. But sensations of feeling better off are likely to become even more noticeable among the top 10 per cent of rich homeowning Britons. Look at the data on sales of watches costing over 5,000 pounds (all bought by people who carry a mobile phone on which the time is visible). Glance at the previous year’s share price trend at Watches of Switzerland in the FTSE 250.
David Page: At best a high wage, high productivity economy is a long-term ambition. Next year, productivity growth is likely to struggle, technically as the economy (hopefully) reabsorbs many of its lower productivity jobs back into employment, including leisure services. More persistently, as successive years of weak business investment since 2016 weigh. Over the longer-term, government incentives for increased investment spending and the inclusion of increased IT into daily life from the pandemic might start to bolster productivity growth. However, this is unlikely to be seen next year. Moreover, with a one-off inflation shock towards 5 per cent unmatched by most wage increases, most people will feel, monetarily, worse off over 2022. That said, depending on the progress of the Omicron variant, the UK might make significant strides in emerging from the shadow of the pandemic by the end of next year — and people may feel much better off on that basis.
Alpesh Paleja: It’s certainly not looking likely in the near-term. Pay growth is likely to pick-up (though the starting point is tricky to gauge, due to pandemic-related distortions in the data), but it will be eroded by persistently high inflation. We’re in for a renewed pay squeeze over much of the coming year, which will hit lower income households in particular.
Similarly, productivity should make up the rest of its Covid-driven shortfall, but we only expect it to get back to its anaemic pre-pandemic trend. While there are positive signs of greater digitisation/tech and innovation adoption among companies, more dedicated action will probably be needed to shift productivity on to a structurally higher trajectory. For example, more pro-investment and pro-innovation regulation to help build new markets, and a competitive tax regime that incentivises business investment across the board.
Ann Pettifor: The UK in 2022 will not look like, or be, a high wage and therefore high productivity economy. There are major uncertainties in reading the pay figures, but, contrary to Bank of England commentary, there is almost no evidence pay growth is accelerating. Average real pay growth is slowing already and is likely to turn negative in 2022. The highest average rises in nominal pay are currently in the financial services sector. The new year’s sizeable increases in taxes and higher energy bills for all households will further limit disposable incomes for most workers on top of reduced benefits for many poorer citizens.
John Philpott: Whatever the course of the pandemic in 2022 most of us can expect a severe financial headache as fast rising inflation eats into wages and household incomes. Although relative wage gains in some labour shortage occupations will continue to benefit some workers, while those on statutory minimum pay rates will also fare relatively well, real wages will fall on average. In the UK’s ultra flexible labour market the unemployment rate now has to drop to around 3 per cent of workers are to gain sufficient bargaining power to secure real wage growth from tight market conditions alone. With unemployment likely to remain broadly stable in 2022 at around 4-5 per cent and inflation rampant throughout the first half of the year before easing only gradually a real wage squeeze can thus be expected. Rapid growth in labour productivity could more than alleviate this but the prospects of a supply side driven UK productivity renaissance in 2022 are about as likely as a total disappearance of Covid-19. Most people will thus feel worse off than they do now; 2022 will be a truly miserable year for living standards.
Kallum Pickering: On balance, most people should feel better off. Record vacancies combined with low unemployment point to solid wage gains that should outpace inflation — real living standards should therefore rise for most workers. In addition, once the UK exceeds its pre-pandemic level of output (likely in Q1) measured productivity should start to rise too. However, fixing the UK’s decade-long problem of sluggish productivity growth will take a number of years of sustained strong private and public sector investment. While the early signs for a productivity upturn are there, survey data suggest that businesses intend to react to price pressures with higher investment, political risks loom large. The UK’s relationship with the EU is still noisy and a full blown trade war is not fully off the cards. Meanwhile, a potential leadership challenge to Prime Minister Boris Johnson may encourage firms to remain in “wait-and-see mode”, and further postpone investment decisions until the economic policy outlook becomes clearer.
Christopher Pissarides: I can find no evidence that the UK will be a high productivity economy at the end of 2022. If it looks like a high-wage one then prepare for more inflation and more monetary tightening and even lower productivity performance
Ian Plenderleith: I very much fear that sluggish growth and unstable politics (making little progress with necessary structural changes) will continue to generate low productivity, but quite possibly with high wages — a dire combination.
Richard Portes: The phrase ‘high wage, high productivity economy’ is an incantation, not a policy, nor are there coherent policies to advance that objective. People will be worse off — partly because of tax increases, partly because wages will not keep up with inflation. What they feel is for the pollsters.
Jonathan Portes: It’s notable that despite a profusion of media reports about wages rises over the summer, real wages are still lower than a year ago and have been falling, not rising, in recent rates, as inflation has taken off. This won’t reverse immediately, although things may improve as inflation recedes. To be fair to the Government, boosting wages and productivity in a sustainable manner was never going to be either easy or quick.
Unfortunately, the Government seems to be keen on quick, politically attractive fixes. Focusing on a few areas and seeking to create ‘good manufacturing jobs’ — even if it is in the industries of the future, such as renewables — is only going to be at most a small part of the answer for a small number of places. Meanwhile, reducing immigration will in itself do little or nothing to boost pay and productivity and may indeed make things worse.
Indeed, a liberal and flexible migration policy — for a small open economy like the UK, highly dependent on high-productivity service sectors — is likely to be an essential ingredient in any credible strategy to boost productivity.
A high wage high productivity economy will require both national and local policies addressed at both people and places, and that don’t pit poor people in London and the cities against deprived areas in the north and Midlands. This means investment in connectivity — physical and digital — that allows skilled workers to have productive, well-paid jobs wherever they live; investment in people, that narrows the divide in skills and productivity between those who go to university and those who don’t; and a new model of the labour market and welfare system that instead of forcing people to take any job — no matter how insecure or precarious — shares risks between employers, workers and the state so as to expand choice and opportunity.
Vicky Pryce: The chances of the UK turning itself into a high wage/ high productivity economy are very slim given the very low historical investment levels in the UK and weakness in trade. And higher wages will if anything make that more difficult as higher costs cannot be passed easily on to the consumer thus hitting profits. We have of course seen increases in wages in many sectors during the course of last year after cuts the year before. This is hardly surprising given the increase in demand following the easing of restrictions seen in the course of the year. But overall the average wage rise across the economy is hardly keeping up with inflation and with the withdrawal of extra pandemic benefits, planned tax rises and with inflation and interest rates rising, average real disposable incomes will be hit. Yes, unemployment is low- lower than in many European countries. Unless policies become very restrictive, that will remain the case in 2022. But it will be very few who feel appreciably better off though there could be a small wealth effect from the higher level of house prices we have seen- though obviously not for everyone!
Thomas Pugh: Wage growth is likely to remain reasonably strong in 2022, but this will be driven by a tight labour market and higher inflation rather than a surge in productivity.
Lower levels of net immigration, a consequence of Brexit and the pandemic, may mean that the workforce grows at a slower rate than previously. The result of strong demand for labour and limited growth in the workforce is that the unemployment rate should drop. We think the unemployment rate will drop to 4 per cent in 2022. That would be only a little higher than the 3.8 per cent registered before the pandemic. As a result, through 2022 we expect nominal underlying wage growth to remain relatively strong at between 3 per cent and 4 per cent.
The combination of soaring inflation, lower benefits and higher taxes over the next six months means that households’ real disposable income will probably fall a little over the next six months. But as inflation falls back quickly in the second half of 2022, and wage growth remains robust, real incomes should start to climb. That will put the economy on a stronger footing going into 2023.
We are also optimistic that the digital revolution and the large amount invested by firms in digital technology recently will result in a jump in productivity. But this will feed through into better productivity over the next decade, rather than the next year.
Sonali Punhani: People are likely to feel worse off. If energy prices are sustained, we think real disposable incomes for the UK consumer can fall by about 1.5 per cent in 2022, the biggest fall since 2011. Higher inflation, higher taxes and monetary policy tightening should squeeze household incomes in 2022. But households have strong balance sheets and high savings, which means they should be able to absorb the real income shock.
Pressures on wages are strong but wage growth is not necessarily being accompanied by productivity improvements. Most of the wage increases look to be concentrated in low skilled sectors. Eventually, labour shortages and high wages could lead to productivity enhancing investments but that requires a strong fiscal push. The most likely scenario is that the Bank of England raises interest rates in 2022 to try and control wage growth.
Morten Ravn: There is little in the outlook for 2022 to reverse the UK’s productivity problem. It has to be resolved through investment in skills and through attracting FDI and skilled foreign labour, none of which appear very likely in the current economic climate.
Ricardo Reis: They will probably feel better than today; I expect real incomes to grow. As for looking like a “high wage high productivity” economy, that is a political slogan, not an economic state that can be evaluated.
Phil Rush: The UK will look like a high wage, high productivity economy . . . in the government’s dreams! More seriously, that caricature isn’t too unreasonable in relative global level terms. It’s just that it has no resemblance to the dynamics of the UK outlook in 2022.
Holger Schmieding: The UK is a high-wage, high-productivity economy. With the fading of the pandemic and some deceleration in inflation, people will feel better off at the end of 2022.
Yael Selfin: So far the rise in wages hasn’t been linked to increased productivity. The transformation of the UK economy towards higher wage and higher productivity economy will require more investment in skills, technology and infrastructure, and will take time to materialise.
Real wages are likely to continue falling in 2022, with the rise in NI contribution as well as interest rates putting further downward pressure on households’ purchasing power.
Andrew Sentence: Economies do not change their characteristics overnight — or in the space of a few years. Productivity trends are long-term and only shift over decades. So the aspiration to boost productivity and real wages in the UK can only be realised by the late 2020s or 2030s. And I don’t see enough policies in place to boost productivity even over that timescale. We need a much stronger policy emphasis on boosting investment in skills, innovation and transport infrastructure. The HS2 debacle shows the mismatch between gov’t statements on productivity and their inadequate actions to back up these statements.
Philip Shaw: Wage growth may rise, but it is unlikely that pay will keep pace with inflation in 2022, which depending where the utility price cap is set in April, looks set to average the year at least around 4.5 per cent. Accordingly, and with personal allowances being frozen, most households will not feel better off. But any negative impact on spending may well be offset by savings accumulated since the start of the pandemic, which we calculate to be in excess of £160bn, or 12 per cent or so of annual consumer spending.
Andrew Simms: It is unlikely that the UK will look more like a high wage, high productivity economy at the end of 2022 than it does now, but we should not assume that the pursuit of both objectives is necessarily compatible, or that they are the best, or a guaranteed way of making people ‘feel better off’.
What needs addressing is how the already wealthy are capturing a disproportionate share of the benefits of economic activity. Something which has been happening for a generation, but which seems to have been further entrenched during the pandemic.
With the poorest half of UK families being £110 worse off since the General Election in 2019 while the top five per cent are an estimated £3,000 better off. Those hit by changes in universal credit have not seen their losses compensated for by other changes. This is where the costs can be seen of the failure to deliver on the UK’s low carbon, rapid transition and levelling-up agendas. Both of which should be creating good quality new jobs where they are most needed.
As the Office for Budget Responsibility still points to rising unemployment this winter, an obsession with productivity — producing more stuff with fewer hands — doesn’t in any way guarantee increasing the number of people getting a living wage, for one simple reason that it drives the technological displacement of employees. Productivity is a bit like cleanliness, hard to argue against. But, like cleanliness too much of which can undermine your immune system, in an economy suffering both overconsumption and underemployment, you can have too much of a good thing.
Also, alongside the trauma of the pandemic, people have glimpsed other possibilities that raise questions of quality of life above those of consumption alone, or its euphemism, ‘standards of living’. They have also seen a wider range of economic possibilities with experimentation in basic income schemes, and the state demonstrating that it can, in fact, be a wage payer of last resort.
Beyond the point that our basic material needs get met, whether we ‘feel better or worse off’ is determined by a huge range of factors beyond income. How relatively precarious or secure is our employment and income is one thing. Working from home more where the nature of work allows it, lowering the time, money and stress spent commuting is another. Having more time, as a result, to spend on friendships, family, cooking, our own interests or a walk in the park are others still.
All these things influence how we should be designing the green, high wellbeing economies we need. And it could be that the experience of the last two years means that people will be unwilling to tolerate the dated mantras of the old economy that seem to involve ever greater sacrifice by the many for the profit of the few.
As a foundation for feeling better off and desirable economic goal, a shift to available work being better shared through a reduction in the working week, underpinned by access to a combination of universal basic services and income, may well displace the formerly hypnotic aim of high income, high productivity.
Nina Skero: In the years leading up to the pandemic, the UK saw stagnating productivity growth as the economic expansion was accompanied by additional hiring and relative under-investment. Wage pressures and the Covid-induced acceleration in digitalisation both have the potential to nudge businesses into making the types of investment necessary to minimise the dependence on lower productivity jobs. The UK, and much of Europe, have quite a bit of scope for this sort of transformation, as it has not already taken place to the extent seen in other economies, such as Japan. However, I would expect these changes to materialise over a slightly longer time horizon into the mid-2020s.
Looking at the factors that will impact how people feel in 2022, the risks are certainly to the downside, especially in terms of inflation. Costs of living are already rising, and the expected continuation of this trend well into 2022 will leave many feeling worse off. Supply chain pressures resulting from the double whammy of global logistical challenges and the post-Brexit trade arrangements are being felt by consumers via long delivery times and reduced goods offering, which will also feed into a lower perceived quality of life.
James Smith: 2022 looks set to be reasonable for wage growth in nominal terms, albeit concerns about a wage spiral look overdone. Momentum in pay growth appears to be slowing now as hiring turbulence seen during the summer reopening subsides. Away from the well-publicised shortage sectors, the jury is still out on how widespread wage pressures have been over the past few months. Whatever happens, wage increases are likely to fall short of inflation for most of 2022.
Andrew Smith: Not at all. Wages generally are not going up and neither is productivity. As ever, any meaningful rise in productivity will require a better skilled workforce and sustained business investment — long-term aims which the government talks about a lot but does little to foster. People will not only feel worse off but many — particularly at the bottom end of the income distribution — will be measurably poorer.
Andrew Smithers: The tax credit for tangible investment appears to be boosting it. If made permanent, and not limited to two years, the rate at which UK’s labour productivity rises should improve from near zero to usefully positive. This will not however be quickly appreciated.
Alfie Stirling: A year is too soon to make much progress on underlying productivity, and much too soon to be able to reliably measure it. Much of the data on productivity will continue to be clouded by statistical artefact and noise for some time, due to the knock-on effects of the pandemic.
There will be more clarity around living standards. The recovery in nominal wages is likely to face further headwinds this year — either due to future waves of infection and a lack of economic support, or premature monetary tightening, or both — and this will be eroded still further in real terms by continued high inflation. On average, people are likely to feel little progress, if not a squeeze, in real terms pay during much of next year.
But such averages will also continue to mask continued divergence and inequality in living standards over the next 12 months. Higher inflation will bite hardest for those on lower incomes who spend more and save less, and especially those that spend a higher proportion of their incomes on fuel and energy. Meanwhile, policy changes such as national insurance rises, which take effect in April, will hit earnings from work far harder than income from capital.
NEF modelling has shown that over the past two years — Dec 2019 to Dec 2021 — the poorest half of UK households are £110 per year worse off on average, while the richest 5 per cent are more than £3,300 better off. On the present trajectory, it is unlikely that this pattern will have been reversed in a years’ time, and more likely it will have been made worse.
Gary Styles: The UK is unlikely to look and feel like a high wage, high productivity economy in the short to medium term. It looks very likely real wages will be squeezed further over the next 12-18 months through a combination of higher inflation, weaker wage growth and some tax increases.
Suren Thiru: Achieving a high wage/high productivity economy may prove to be a pipe dream if business investment continues to lag the wider recovery and rising business costs limit firms’ ability to offer higher wages over a sustained period.
2022 could well be characterised by a cost of living crisis for many households with inflation likely to increasingly outpace wage growth through this year, further squeezing household incomes, particularly given the impending National Insurance hike.
Household savings may surge this year as consumers look to combat squeezed incomes amid rising costs and looming tax rises.
Phil Thornton: People will feel worse off, certainly by the middle of the year as inflation continues to rise, energy prices rise, and incomes flatline amid little evidence of pay rises responding to higher prices. The second half may see an improvement and the data for living standards may be better year-on-year in Dec 2022 but it is unclear whether consumers will actually register that.
Samuel Tombs: The UK will not close the productivity gap with other advanced economies next year. Business investment accounted for just 9 per cent of GDP in 2021, the lowest share for 10 years, while the potential dividends from the recent pick-up in public sector investment lie many years ahead. Meanwhile, households’ real disposable income looks set to fall by about 1 per cent in 2022, due to high inflation and rising taxes. Most households, therefore, will feel slightly worse off, though some have amassed large savings over the past two years which will enable them to spend more regardless.
Kitty Ussher: Productivity increases depending on private sector investment which means different things to different companies, and is in turn very affected by how business leaders perceive the future path of the pandemic.
The forthcoming increase in costs — notably the rise in employers national insurance contributions in April — will also make it harder to free up funds for investment.
Having said that, overall more people will feel better off for the simple reason that, given what we know now, the economy is expected to grow in 2022 and within it a tight labour market will provide many opportunities for those who are seeking advancement.
Moreover, people who in the past were excluded from opportunity through location, mobility or caring commitments will find their prospects improved through the new norms of location flexible working. The forced investment in digital technology during 2020 will also start to bear fruit for many firms as conditions normalise.
For households already on low incomes whose financial position was not improved by the pandemic, however, as well as people who are not able to look for new work, and pensioners not on index-linked incomes, 2022 will lead to new vulnerabilities due to rising prices of consumer goods and in particular energy.
John Van Reenen: It will not. Cutting immigration does nothing to create high wages or productivity and the absurd diamond hard Brexit pursued by the government has permanently added to our productivity woes. A reinvigorated Growth Plan is needed based on long-term investment in innovation, infrastructure and skills (especially intermediate skills and in disadvantaged schools to prevent a lost generation). See https://04212c19-9fed-4a2e-80c8-3a72a0c13520.filesusr.com/ugd/b451bf_b235450fbc244f2ab47afa4b7a983dc0.pdf
David Vines: Productivity will fall for reasons described in (1) above. And higher wage settlements will not be widely achieved for reasons explained in (2) above. As a result, living standards will fall. This will be widely understood by the general public within a year from now. The present government seems to think that technical progress can be brought about by magic, simply as a result of higher wage settlements. This is fantasy. These improvements require education, training and investment, all of which take time to have an effect.
Sushil Wadhwani: The UK’s journey to a high wage, high productivity economy can only be a long-term aspiration and can hardly be achieved in a single year. People are highly likely to feel worse off as headline inflation is likely to take some time to subside and wage inflation is unlikely to rise enough to maintain living standards.
Martin Weale: It is more likely to look like a high wage high inflation economy, and people will feel worse off than they do now.
Simon Wells: Inflation could peak at 6 per cent in April. Alongside planned tax rises and cuts in benefits, this will squeeze on real-terms incomes. So despite solid wage and employment prospects, we expect UK real household incomes to fall by almost 2 per cent in 2022. This doesn’t suggest a high wage economy.
Peter Westaway: Not at all, this sound bite is pure disingenuous political spin. In the immediate future, real wages are likely to be eroded, in particular, due to rising energy prices and food prices. Some sectors of employment where labour is in short supply might see wage gains, but this will not be supported by higher productivity.
In the much longer run, those sectors where labour supply is restricted might see productivity gains as capital replaces labour. But that won’t be an option in service sectors suffering chronic shortages less amenable to mechanisation such as nursing or care homes.
By the end of 2022, GDP will likely be higher than now, but people will feel worse off with personal disposable income more likely to fall caused by the deterioration in the UK terms of trade and higher tax rates (though higher taxes may be delayed until after the next election).
Michael Wickens: To judge by long historical performance large productivity gains are very unlikely. Inflation is likely to make people feel worse off.
Trevor Williams: Worse off as inflation is eroding real incomes. And tax rises are due.
Stephen Wright: Unfortunately, it is almost certainly a requirement that people feel worse off, at least financially. And this is likely to last much longer than next year, due to a combination of Brexit and Net Zero. We can only hope that changes in lifestyle post-Covid may provide some offsetting relief.
Linda Yueh: Although earnings growth is forecast by the OBR to be around 4 per cent in 2022, inflation is expected to outpace it. Some people may feel worse off as a result despite the stronger wage growth and a tight labour market. One year won’t be enough to achieve a high productivity and wage economy, but so long as wages rise in line with productivity growth, then that is moving in the right direction.
Is there anything else you would like to tell us?
Nicholas Barr: My hunch is that if pandemic effects recede, Brexit effects will come more to the fore.
Ray Barrell: Projections are always difficult. Covid is a once a one hundred year event (after the Flu epidemic in 198-1919) that makes projections closer to guesswork than usual.
David Bell: To improve UK growth prospects, policy has to address not only the productivity problem in general, but also the sectoral and geographical shifts that stem from the pandemic and Brexit.
Philip Booth: Once again, those who monitor broad money will be able to forecast the “big” trends. It is about time the central bank did the same.
Nick Bosanquet: The pandemic has brought surprises . . . the stability of the labour market, supply chain disruptions, strong competitive effects from internet trading and low investment in green energy: there is one further surprise . . . the collapse in credibility of economic forecasting. Congratulations on the honesty of the OBR . . . they reported on their “largest year ahead forecast error on record”. In March 2020 forecast for UK GDP was -0.1 per cent Out-turn was -10.9 . . . as OBR graciously comments:” for next year and the next few years forecast errors will be much larger than is typically the case.” Most official graphs still treat inflation as a one off with a sudden fallback to 2 per cent . . . failure to recognise that inflation is becoming a longer term process, which feeds on itself through adjustment lags. The officials also fail to report on the looming political risks. Crises around China and/ or Ukraine mean a 30 per cent chance of a major world slump in the next five years. More surprises to come!
Erik Britton: Covid is the cake in the UK’s weak performance over the last couple of years; Brexit is the icing. The icing is starting to look rather thick, especially if the signals about migration flows (out of the UK) are correct.
Jagjit Chadha: Fiscal policy continues to confuse an instrument — the deficit — with the objective — supporting economic well being. We do need to cast a more stern look at the Chancellor’s budgetary plans in the medium term and the extent to which they will support a levelling up plan that is in danger of not surviving first contact with the regions.
David Cobham: The Conservative party remains intellectually (as opposed to politically) wedded to the theories used to justify austerity, which is why it is incapable of articulating a levelling up project. On the other hand, the Labour party is still finding it difficult to develop a coherent economic strategy that is both in line with modern economic understanding and significantly pro-poor and anti-inequality. So there is an absence of the political leadership which would be necessary for the UK to overcome the problems it faces, from the last few decades of distorted development, from the changes in the world economy and of course from Brexit.
Former senior official: The elephant is refusing to leave the room. What happens to the economy will be dependent on whether the pandemic and its economic impact subsides after the current surge or continues in waves through the next year.
Andrew Hilton: Can you really tell anything from a questionnaire like this? The UK economy is not autarchic; what happens at the FOMC or ECB level is at least as important as what the BoE does — and if Russia shuts off gas to Western Europe or Israel attacks Iran or Beijing seizes Kinmen and Matsu or even if the EU slaps sanctions on the UK for breaking the NI Protocol will knock any predictions out the window.
Dhaval Joshi: Covid will become an endemic disease like the flu. The problem is that our under-resourced healthcare systems can barely cope with a bad flu season, let alone a combined bad flu plus bad Covid season!
Hence, in 2022, we should expect further disruptions to the UK economy from periodic forced non-pharmaceutical interventions, such as mask-mandates and travel bans.
Ruth Lea: Much will depend on the Government’s approach to Covid — it is time we started to live with it.
John Llewellyn: Having been an economic forecaster on an off (mainly on) all my life, I have come to realise that while it might be hoped that, at this unusual time, the seventy-odd years of increasingly-detailed economic data since WWII could offer considerable useful evidence, that is not really so, for the following reason.
Post-WWII economic history can be characterised as runs of many years of comparatively small perturbations and fluctuations, punctuated by a few large shocks and commensurately big consequent fluctuations. Typically, evidence obtained from the small fluctuations contains little information that is useful in figuring out what will happen in response to a large shock. Not only are relationships likely non-linear but, more fundamentally, the nature of large shocks usually differs qualitatively from the impulses that characterise minor fluctuations.
That might lead to a supposition that the useful evidence for analysing the likely consequences of a large shock is, therefore, to be found mainly in previous large shocks. But, unhelpfully, that is generally not so. Most of the (limited number of) large shocks differ in important respects from one another. And, furthermore, the underlying conditions in which these various large shocks worked their way through typically differed importantly from one to another.
Not surprisingly, therefore, the ability to forecast events reflects all this. Forecasting errors divide into a large number of comparatively small errors, made in the years when fluctuations are small; and a few large errors, made following shocks that are both large and novel.
The implication is that the only viable approach to understanding and thence forecasting the effects of a large shock such as the coronavirus shock is to take from past shocks anything that may be relevant — discarding all that which is not − and put together a composite analysis. And then where, as so often happens, there is no relevant evidence, to fall back on a priori reasoning.
In short, it is the story that matters, not the number.
Christopher Martin: This year, economic forecasts should be treated with even more scepticism and caution than usual. We will not get a clear idea of what is happening until Covid-19 is (finally) behind us. But we can be sure that UK growth will be held back until there is substantial and sustained investment in physical capital and, more importantly, education and skills. At present, I do not see a credible strategy for achieving this
Patrick Minford: It is important not to confuse short term disruption to trade patterns due to Brexit with long term gains from reducing EU protectionism through new trade agreements.
Andrew Mountford: Corruption is a real danger for the long run productivity and prosperity of the UK economy. One of the most influential academic economic research agendas in recent years has been that of Acemoglu and Robinson on ‘extractive’ versus ‘inclusive’ institutions, (summarised in their book “Why Nations Fail”). They argue that the contrasting levels of productivity and wealth between countries stems from the difference in institutional quality. They illustrate their argument by comparing the paths to success of the richest people in Mexico and the USA (p39). The richest man in Mexico, they allege, became ultra wealthy through government regulated monopolies and political contacts, whereas the success of some of the wealthiest people in the USA stems from technological innovation. One doesn’t have to uncritically accept all aspects of their thesis to be persuaded of the very harmful long run effects for an economy if success becomes ever more determined by personal contacts and access to lucrative public contracts rather than productive and innovative activity, or in Acemoglu and Robinson’s terminology, if institutions become extractive rather than inclusive. Inclusive institutions are those which protect the public interest, nurture talent and allow effort to be rewarded. Examples include legal institutions and law enforcement that protect property rights, educational and training institutions, financial regulations that enforce financial fair play and tax authorities that ensure large companies pay the same tax as small local companies. These institutions are a vital public good and they require adequate investment.
The natural way to fund vital public investment which underpins the wealth of the entire economy, is by a tax on the wealth of the entire economy. In the UK this would be most practically achieved by taxing the value of land. Land cannot be moved to evade taxation and its price depends as much on the ability of people to pay for it, ie on the health of the economy, local planning policy and regional investment, as in the actions of the landowner. The ONS estimates the value of land and assets-over-land to be significantly more than £5 Trillion compared to a GDP of a little more than £2 Trillion. Thus a 1% tax would be worth circa 2.5% of GDP and so could back substantial spending each year. This would allow for a positive annual public investment flow backed by additions to the stock of public owned assets which can be realised later.
John Muellbauer: This must be one of the most uncertain outlooks in the last 30 years. Climate change and the response to it could well cause further large shocks in 2022 in addition to the course of the pandemic.
Andrew Oswald: The search by well-off people for rural properties (with plenty of land) is likely to become intense. Pandemics make humans buy space.
David Page: Political developments will be important next year. Northern Ireland’s elections in May look set to take on significant importance. Moreover, the government is likely to consider the prospect of an early election late in 2023. Although we doubt this will happen, next year’s Autumn Budget will likely set fiscal policy to keep this option open.
Ann Pettifor: The ongoing global financial crises are not resolved and will be made worse by austerity. These developments reflect the endgame of a system that for 40 years has failed the world.
Christopher Pissarides: I think the monetary tightening was mistimed. The bank should have waited for more clarity about an end to the pandemic before taking action. By tightening now, it might have a negative impact on private demand and on the willingness of the Chancellor to use fiscal policy to support the economy
Jonathan Portes: One bright spot over the past year, which may portend well for the future, is the relatively successful and trouble-free implementation of the new immigration system. This represents a considerable liberalisation of immigration policy towards those coming from outside Europe, with about half of all jobs now eligible for a skilled work visa, with no resident labour market test; meaning that the UK now has a more liberal work migration policy than any major EU country, and arguably than any major advanced economy. Skilled work visas are already running considerably above pre-pandemic levels, especially in the health sector. Moreover, migration from Hong Kong — about 80,000 visas have already been issued — could give the UK economy a real boost. Despite the Government’s retrograde rhetoric and policies on refugees, migration is one area where Global Britain might yet prove to be a slogan with actual substance.
Vicky Pryce: This coming year will be crucial for determining how big the eventual ‘scarring’ from the pandemic in terms of GDP might be. On the fiscal front, there will be some help that will be needed to help businesses and possibly also individuals as well as sustaining the NHS and that will be costly. As a result, one can no longer be confident that the fiscal position will improve sufficiently in later years to allow for any big tax giveaway before the next election, whenever that might be. On the positive side inflation and interest rates may rise less fast- and hopefully, a bit more attention will be paid to improving the UK’s crucial trading relationship with Europe.
Ricardo Reis: The patterns of world trade seem to be changing in response to the pandemic and to the increase in protectionism of the major economic blocks. Brexit and less regulation and taxes were supposed to allow the UK economy to more flexibly respond to changes like this one. 2022 will be the final big test of those promises (after mostly failing other tests so far, eg, Northern Ireland). Judging by what we have seen so far, I am not optimistic.
Yael Selfin: It is quite likely that Omicron will not be the last variant the economy will need to deal with, and there are other potential shocks in the background which could disrupt the recovery next year. However, the economy is relatively resilient at present with almost full employment and a high savings rate, and the pandemic has shown us how flexible businesses and government can be when unexpected situation arises.
Andrew Sentence: You did not ask about the level of UK interest rates at end-2022. I predict they will be in the region of 1-2 per cent despite the reluctance of the MPC to raise rates. Even this will be insufficient to keep inflation on target so further rises may be needed in 2023 and beyond.
Andrew Simms: The terms of current economic commentary seem chronically disengaged from the real world of pandemic shocks, corrosive social inequality and the epochal challenge of the climate emergency. The old obsessions of growth, productivity and inflation remain entrenched. But the urgent and inescapable economic tasks are reversing the destabilising dynamic of rising inequality and doing so while re-engineering business, finance, our lifestyles and livelihoods to avoid climate and ecological breakdown. On one level this is being increasingly acknowledged by policymakers and financial institutions, but there is still a scant sign that in the UK we are overcoming the inertia of an economy that seems to function as an engine of inequality and ecological degradation.
Andrew Smith: The government is repeating the same mistake as the past decade — targeting the budget deficit when it should be using fiscal policy to support growth. It will have the same results — depressing growth and making it more difficult to cut the deficit. Bonkers
Andrew Smithers: Policy should aim at keeping unemployment as low as possible and boosting labour productivity. The first requires a quick reversal of QE and the second making the investment tax credit permanent.
Suren Thiru: Trade is likely to drag on the UK economy in 2022, reflecting the challenging outlook for UK exporters, amid the ongoing interruption to trade flows from Covid and continued post-Brexit disruption to trade with the EU.
The risks to UK’s economic outlook for 2022 are increasingly tilted to the downside. The Omicron variant could derail the recovery by triggering a prolonged reluctance among consumers to interact and spend, exacerbating staff shortages and driving more supply chain disruption.
Tougher Covid restrictions to tackle rising Covid cases could drive a mild contraction in quarterly GDP early this year by damaging confidence and suffocating activity.
Kitty Ussher: The main economic story at the moment is that this is an economy that wants to grow. For as long as people believe that the worst of the pandemic is behind us, strong demand will keep the fundamentals moving in the right direction: the uncertainties are more about the pace than the direction.
David Vines: I expect the effects of Brexit to be very damaging. A major task of economic policy over the next five years will be to remedy these effects. A second major task — this one a task of persuasion — will be to convince policymakers not to introduce austerity too rapidly, as was done after the global financial crisis. Even with a high level of public debt, there is sufficient fiscal space for the country to be able to avoid making the same mistake twice.
Sushil Wadhwani: The greater risk to the global economy relates to whether the US Federal Reserve will succeed in “soft landing” the economy. They are “behind the curve” and will have to work hard to catch up. Our generation of economists had learnt the importance of central banks dealing with emerging inflationary pressure in a pre-emptive manner (On a “stitch in time” argument). We were all influenced by the late Rudi Dornbusch who argued that it was the Federal Reserve that had “caused” many post-WWII recessions. Sadly, pre-emption was jettisoned, and we may now have to bear the consequences.
Martin Weale: Given Omicron it is quite likely that the budgetary position will be of increasing concern.
Peter Westaway: Compounding the falls in labour income, asset price returns are likely to be subdued in 2022 and the years ahead with an elevated risk of a market correction. Investors need to guard against the temptation to skew their portfolios towards exotic assets offering the false prospect of higher risk-free returns.
Michael Wickens: The FT needs more regular economic analysis from academics and less from journalists and City economists who tend to herd in their opinions.
Trevor Williams: Monetary and fiscal policy a risk if wrongly used.
Linda Yueh: Unemployment continuing to decline through 2022 in line with forecasts will be important to watch as an important part of the extent of scarring in the economy due to the pandemic.