The Young Fabians Economy and Finance Network give their monthly report on the state of the British economy, amid rolling strike action and continued inflation.
In what may be seen as the sequel to the Winter of Discontent, a tidal wave of industrial action, primarily from nurses, ambulance staff, and rail workers, has grabbed the headlines over the last couple of months.
It appears that the inflationary pressures currently bombarding the economy have resulted in real and widespread frustration. According to the latest figures released from the ONS, from August to October 2022, growth in employee earnings (presented as average weekly earnings (AWE)) fell in real terms (adjusted for inflation) by 2.7%. It’s abundantly clear that across the country, pay isn’t keeping in line with inflation.
Perhaps most telling of all, when trying to understand the deep seated frustration from workers across the public sector, is that further ONS statistics show that private sector workers experienced a 6.9% increase in pay during the same period (Aug to Oct 22), three times the rate of 2.7% seen among public sector workers. Hunt and Sunak clearly don’t understand the underlying causes of inflation, and their fears of a wage-price spiral (where wages and prices increase in a mutually reinforcing cycle) seem to be misguided, given that the reality is that real wage growth remains destructively negative. During this inflationary crisis, labour market structures have resulted in workers not being provided with enough bargaining power for fair pay, resulting in the inability of many to maintain their standard of living. Little wonder then, that with workers worrying whether they can heat their homes, or feed their kids, many are left with no choice but to strike.
There is a sign for optimism however, with the most recent figures released by the ONS showing that Consumer Price Inflation (calculated by measuring the rate of change in the cost of goods and services consumed by households), has decreased from 11.1% in October to 10.7% in November. This is in line with the widespread consensus from both economists and the Bank of England alike, that due to a combination of monetary tightening (increasing interest rates and selling of government bonds), falling oil prices, and solutions to the temporary supply shocks after the pandemic, inflation is due to sharply drop from 2023 onwards, with the Bank of England estimating that by Q1 2024, inflation will reach its target of 2%.
The Bank of England's Monetary Policy Committee (MPC), which sets monetary policy to meet the 2% inflation target and sustain growth and employment, voted by a majority to increase the Bank Rate by 0.5 percentage points to 3.5% at their most recent meeting on 14 December 2022. This will most certainly have a recessionary effect, because it makes borrowing money more expensive, which can lead to a decrease in consumer and business spending. The economy had already fallen into a recession in Q3 2022, with GDP contraction of 0.2%, according to figures released by the CBI. They also estimate that the economy is set to shrink by -0.4% in 2023, with GDP only returning to its pre-covid level in Q2 2024. The government urgently needs to find solutions to address our falling productivity, which remains low,
measuring 2% below its pre-pandemic level, if we are to combat the recession without adding upward pressure to inflation.
According to the Bank of England (BoE), about four million UK households will face higher mortgage payments this year, with no doubt that further planned hikes to the BoE base rates - markets predict a 4.6% bank rate by July - will compound the rise in mortgage repayments. As much as Hunt may have calmed the markets in his Autumn Statement, the ghosts of the mortgage turmoil as a result of the mini-budget still remain. As is the nature of markets, rates are sticky down and slippery up.
The UK's labour market remains tight (where vacant jobs are abundant and available workers are scarce), although indications of a decline in labour demand have emerged. A decline in economic activity is likely to affect the labour market, leading to a moderate increase in unemployment. Projections indicate that the unemployment rate will reach a peak of 5% during Q4 2023 or Q1 2024, up from its current level of 3.6%, before falling to 4.5%. Despite the modest increase in unemployment, it is still possible for the labour market to remain relatively tight.
This month’s economic update suggests that tough times lie ahead, and the current stagflationary crisis this country faces will disproportionately hit the pockets of working people the hardest. The tightening of monetary policy imposed by the Bank of England will contribute a fair bit towards quickly shrinking inflation, even if they may have been slightly slow to respond, and so a lot of economic focus towards the end of this year will focus on combating the recession.
This post was authored by Connor Escudero, on behalf of the Young Fabians Economy and Finance Network.
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