The UK will follow other developed countries in its economic recovery from the 2022 pandemic, with economists polled for a Financial Times poll predicting it will be held back by political uncertainty and the ongoing aftermath of Brexit.
Of nearly 100 economists, a majority said British living standards would deteriorate in the coming year, with poorer households being hit hardest by rising inflation and higher taxes.
The biggest challenges facing the country’s economy were global in nature: high energy prices and broader pandemic-related inflationary pressures; persistent labor shortages and disruption of supply chains; continuous waves of viral infections; and the increasing risks of climate change.
But many have argued that the UK would find it more difficult to deal with these shocks than its peers, as fiscal support declines, Brexit trades damage and supply bottlenecks worsen, and political uncertainty seems increasingly likely to deter investment.
“A combination of a skewed lead over Brexit and political uncertainty will continue to hamper what could otherwise have been a strong recovery,” said Jagjit Chadha, director of the National Institute for Economic and Social Research.
“Recovery is driven by optimism about the future. . . Brexit will enforce chronic pessimism about the future of the British economy, ”said Paul de Grauwe, professor at the London School of Economics.
At first glance, this pessimism may seem exaggerated: several respondents said that the growth rate of the UK’s gross domestic product in 2022 should be greater than that of the eurozone, even if stimulus were likely to drive a faster expansion in the US.
Kallum Pickering, senior economist at Berenberg, said consumers have the benefit of “record high net worth, booming labor markets and a huge pile of excess savings”, while businesses have solid investment intentions.
But Paul Dales, chief economist at the UK at consulting firm Capital Economics, described strong growth as a statistical mirage generated by the pandemic. He and several others noted that the UK economy was recovering faster as it sank into a deeper hole, with the level of GDP not yet recovering its 2019 level.
With full customs controls taking effect in the UK in 2022, many have said Brexit would exacerbate pandemic-related trade frictions, with supply chain blockades and labor shortages more persistent than in other countries, and inflationary pressures more pronounced.
John Llewellyn, an independent consultant, and Sushil Wadhwani, an asset manager and former Bank of England rate setter, said it would force the BoE to tighten monetary policy more than other central banks, hitting the UK’s recovery relative to its peers delayed over time.
While some have given the government credit for its handling of the pandemic over the past year – particularly the speed of vaccine deployment – there was little confidence that ministers would continue to support the recovery.
Wadhwani pointed to the government’s apparent “unwillingness” to help businesses affected by the Omicron coronavirus variant, while Barret Kupelian, senior economist at PwC, cited “threatening tax increases” and Morten Ravn, professor at University College London , said the UK’s high public debt meant it would be “difficult to bring about either a stimulus or a significant tax reform”.
For others, the government itself was a central part of the problem. A series of scandals have hampered the poll ratings of Prime Minister Boris Johnson and created the specter of a leadership challenge. Respondents to the survey cited “unstable politics” and the absence of a credible plan to boost long-term productivity.
Panicos Demetriades, a professor at Leicester University and former governor of Cyprus’ central bank, predicted that there would be questions about dealing with Brexit and Johnson’s “arbitrary, if not chaotic, style of government”. Pickering said a potential leadership challenge to Johnson could “encourage firms to stay in ‘wait-and-see’ mode, and delay investment decisions until the economic policy outlook becomes clearer”.
However, one problem that is not the government’s making will dictate the outlook for households’ living standards over the coming year: inflation. It hit 5.1 percent in November, its highest level in more than a decade, and will soar in the first quarter of the year and stay well above the BoE’s 2 percent target by the end of 2022.
Almost everyone who responded to the survey said it would leave people significantly worse off by the end of the year because average wages would not keep pace with prices and rising taxes.
“Whatever the course of the 2022 pandemic, most of us can expect a severe financial headache,” said John Philpott, an independent consultant. Workers in deficit occupations, or those who benefit from a large increase in the statutory minimum wage, will do relatively well, he added, but most will not have enough bargaining power to ensure real wage gains if unemployment remains stable.
“We are in favor of a renewed wage squeeze over much of the coming year, which will particularly affect lower-income households,” said Alpesh Paleja, chief economist at the CBI.
Some respondents said households will continue to spend despite the wage squeeze because they can draw from savings raised during austerity, while DeAnne Julius, a fellow at Chatham House, said that if wage gains are concentrated among the lower paid, where labor shortages were most obvious, then “many people will feel better about it than they do now”.
But Melanie Baker, an economist at Royal London Asset Management, warned that the year had already started poorly for workers in sectors affected by Omicron, with no leave scheme in place to support lost earnings.
David Bell, a professor at Stirling University, said a standard of living crisis would be “acute” for poorer households, who spend a larger share of their income on energy. And Dave Innes, chief economist at the Joseph Rowntree Foundation, said support for millions of people unable to work through illness or disability would be at its lowest in real terms since 1990.
Despite this near-consensus on the bleak outlook for household finances, there have been widely differing views on what the BoE can or should do to prevent a cost-of-living crisis.
One group felt that monetary policymakers could do little to boost inflation, which was largely due to the effects of the pandemic to skew demand for goods while disrupting supply – pressures that would ease by the end of 2022, regardless of the course of the central bank.
“Current inflation is not a monetary phenomenon. . . For me, the biggest impact on prices seems to be an adjustment in relative prices, which must take its course, ”says Christopher Pissarides, professor at the LSE, adding that the BoE’s rate hike in December will affect both private demand and Chancellor Rishi. can hit. Sunak’s willingness to support the economy through fiscal policy.
“The extent to which central banks have ever been in ‘control’ of inflation is very exaggerated,” said Ann Pettifor, director of the economists’ network, Policy Research in Macroeconomics.
But another group said the BoE should be prepared to raise interest rates, as it has begun to do, to prevent higher inflation from becoming a permanent feature, as businesses and workers expected inflationary growth, and their own prices and wage demands accordingly. determined.
This group felt that the BoE had an “unenviable task” and would “fight an upward drift in inflation expectations”, with the risk that higher inflation could be hedged if the pandemic changed the dynamics of the labor market, or if Covid- 19 became endemic, with each new wave of infections leading to fluctuations in demand between goods and services.
Kate Barker, a former member of the Monetary Policy Committee, said that “to be prepared to act now must dampen the tendency for higher inflation to be baked into expectations”. Melburn Davies, chief economist at Redburn, said the BoE’s challenge would be “to strike the right note between maintaining credibility now and not undermining the recovery in 2022-’23”.
Despite the prevailing pessimism about growth, inflation and living standards, several respondents made an effort to point out that it would not be “all downfall” in the year ahead.
They saw room for a long-awaited boom in business investment, fueled by labor shortages, Covid-induced digitization and the need to adopt green technology. It can “encourage businesses to make the type of investments needed to reduce the dependence on jobs with lower productivity”, according to Nina Skero, CEO of consulting firm Cebr, although she and others stressed that real progress with productivity will take years. take and need. a much greater pressure from the government.
A year from now, however, the state of the British economy is likely to depend less on what happened to inflation or investment than on the course of the pandemic. As Andrew Hilton, director at the Center for the Study of Financial Innovation, pointed out, a decline in real wages on consumers weighed less than “the gloom caused by fear of relentless restrictions”.
‘Let’s hope for a post-pandemic boom – finally. This is the phenomenon that will probably end 2022 on an optimistic note, ”said Diane Coyle, professor of public policy at the University of Cambridge.
Kitty Ussher, chief economist at the Institute of Directors, also predicted better times. “Ours is an economy that wants to grow,” she said. “As long as people believe that the worst of the pandemic is behind them, strong demand will move the fundamentals in the right direction.”