It’s no great secret that the events of the past few years have delivered a serious economic blow to the UK. But just how many years has the country been set back? This morning the National Institute of Economic and Social Research has published its updated ‘Economic Outlook’ which digs into some of these figures, erring on the pessimistic side of the forecast spectrum.
According to the NIESR’s new report, the UK economy is still a year off reaching its pre-pandemic levels. In the last quarterly update, the country’s GDP still sat 0.5 per cent below its level in the last quarter of 2019 – a figure that the Bank of England thinks will finally make a full recovery by the end of 2023. But the NIESR forecast ‘does not have it passing this level until the third quarter of 2024’ – a year later than is expected by the Bank. Meanwhile, today’s update shows the rate of inflation settling slightly above the Bank’s forecast for the end of the year – at 5.2 per cent by the end of the year – still just within the bounds of Rishi Sunak’s target.
The main culprits responsible for this lost wealth and hit to prosperity, according to the NIESR, are the pandemic, Brexit and Russia’s war against Ukraine. These are three very commonly cited areas that are often bunched together, as the overlap of these events makes it increasingly difficult to pinpoint specific blame. (Take the UK’s tight labour market, which has contributed to a high inflation rate: the exodus of millions of workers during the pandemic, coupled with the crackdown on ‘low-skilled’ immigration from Europe, coupled with goods shortages due to the war all combine to create over a million job vacancies and surging prices).
But even when the economy gets back to its pre-pandemic levels of GDP, there is no guarantee it will stay there. The think tank’s estimates for GDP this year are roughly in line with other bodies, estimating 0.4 per cent growth overall, alongside the IMF and just above the OECD’s predictions. But come 2024, NIESR stands out as far more pessimistic. It estimates just 0.3 per cent growth and predicts a technical recession next year. The think tank does not rule out a recession in 2023, but estimates a ‘60 per cent risk of a recession at the end of 2024’ as the interest rate hikes from the Bank are felt more by consumers, and further impact their spending habits.
This prospect of recession seems to be rising amongst forecasters, as the question turns from ‘if’ to ‘when’. Capital Economics is predicting a recession before the end of the year. The IMF’s most recent updates predict the UK will just about avoid recession, but only on the condition that serious public policy reforms are implemented soon, including more tax incentives for businesses and getting a grip on the long-term sickness problem that is crippling the UK workforce.
Meanwhile, the cost-of-living crisis continues to take its toll: despite all the talk recently of rising wages – with regular wages (excluding bonuses) up 7.3 per cent from March to May this year – the NIESR emphasises in its report the extent to which wages hikes have still fallen well below the rate of inflation so far, forecasting that real wages in a range of UK regions – including the east of England, South-East and West Midlands – will stay well ‘below pre-pandemic levels by the end of 2024.’ In other words, it’s not going to take years, not months, for people to feel their disposable income is back to pre-pandemic levels. That’s before you even start accounting for the years of lost opportunity in between.
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