The UK will follow other developed countries in its economic recovery from the pandemic in 2022, with economists polled for a Financial Times survey predicting it will be held back by political uncertainty and the lingering aftermath of Brexit.
Of nearly 100 economists, a majority said living standards in the UK would deteriorate over the coming year, with the poorest households hardest hit by soaring inflation and rising taxes.
According to them, the biggest challenges facing the country’s economy were global in nature: high energy prices and broader inflationary pressures related to the pandemic; continued labor shortages and disruption of supply chains; continuous waves of viral infections; and the growing risks of climate change.
But many have argued that the UK will find it harder to weather these shocks than its peers, as fiscal support dwindles, Brexit hurts trade and exacerbates supply bottlenecks, and the Political uncertainty seemed increasingly likely to discourage investment.
“The combination of an uneven edge on 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.
“Recoveries are driven by optimism about the future…Brexit will impose chronic pessimism about the future of the UK economy,” said Paul de Grauwe, a professor at the London School of Economics.
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At first glance, this pessimism may seem overdone: several respondents said that the UK’s gross domestic product growth rate should exceed or at least match that of the eurozone in 2022, even if the stimulus was likely to propel faster expansion in the United States.
Kallum Pickering, senior economist at Berenberg, said consumers were benefiting from “record net worth, a booming labor market and a huge pile of excess savings”, while businesses had strong investment intentions.
But Paul Dales, UK chief economist at consultancy Capital Economics, described robust growth as “a statistical mirage generated by the pandemic”. He and several others noted that Britain’s economy was bouncing back faster because it had sunk into a deeper hole, with the level of GDP yet to recover to 2019 levels.
With full customs controls coming into force in the UK in 2022, many said Brexit would worsen pandemic-related trade frictions, with supply chain lockdowns and labor shortages more persistent than in other countries, and more pronounced inflationary pressures.
John Llewellyn, an independent consultant, and Sushil Wadhwani, an asset manager and former Bank of England rate regulator, said this would force the BoE to tighten monetary policy more than other central banks, slowing the Kingdom’s recovery United relative to its peers over time.
While some gave the government credit for its handling of the pandemic over the past year – in particular, the speed with which the vaccine was rolled out – there was little confidence that ministers would continue to support the recovery.
Wadhwani pointed to the government’s apparent “reluctance” to help companies affected by the Omicron variant of the coronavirus, while Barret Kupelian, senior economist at PwC, cited “imminent tax increases” and Morten Ravn, a professor at the University College London said the UK’s high public debt meant it would be “difficult to conceive of either stimulus or meaningful tax reform”.
For others, the government itself was at the heart of the problem. A series of scandals have rocked polls for Prime Minister Boris Johnson and raised the specter of a leadership challenge. Survey respondents cited “unstable policies” and the lack of a credible plan to boost long-term productivity.
Panicos Demetriades, a professor at the University of Leicester and former governor of the central bank of Cyprus, predicted there would be questions about the handling of Brexit and Johnson’s “arbitrary, if not chaotic style of government”. Pickering said a potential leadership challenge for Johnson could “encourage companies to stay in ‘watchful’ mode and postpone investment decisions until the economic policy outlook becomes clearer.”
A problem that is not the fault of the government will however dictate the outlook for household living standards for the coming year: inflation. It hit 5.1% in November, its highest level in more than a decade, and is expected to surge in the first quarter of the year and remain well above the BoE’s 2% target at the end of 2022.
Almost everyone who responded to the survey said it would make things much worse for people at the end of the year, as average wages would not keep pace with prices and rising taxes.
“Regardless of the course of the pandemic in 2022, most of us can expect serious financial headaches,” said John Philpott, an independent consultant. Workers in shortage occupations, or those benefiting from a steep rise in the statutory minimum wage, would fare relatively well, he added, but most would not have enough bargaining power to secure jobs. real wage gains if unemployment remained stable.
“We are going to see further wage compression for much of the coming year, which will hit low-income households in particular,” said Alpesh Paleja, chief economist at the CBI.
Some respondents said households would continue to spend despite the wage squeeze as they could dip into savings accumulated during lockdowns, while Chatham House colleague DeAnne Julius said that while wage gains were concentrated among low wages, where labor shortages were clearest, then “many people will feel better than they do now”.
But Melanie Baker, an economist at Royal London Asset Management, warned the year was already off to a bad start for workers in sectors affected by Omicron, with no furlough scheme in place to make up for lost earnings.
David Bell, a professor at the University of Stirling, said a crisis in living standards would be “acute” for poorer households, who spend a greater proportion of their income on energy. And Dave Innes, head of economics at the Joseph Rowntree Foundation, said support for millions unable to work due to illness or disability would be at its lowest in real terms since 1990.
Yet despite this near-consensus on the bleak outlook for household finances, opinions were widely divided on what the BoE could or should do to avoid a cost-of-living crisis.
One group said there was little monetary policymakers could do about a spike in inflation that was largely due to the effects of the pandemic in skewing demand toward goods while disrupting supply. – pressures that would ease by the end of 2022, regardless of the decision taken by 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 needs to run its course,” said LSE professor Christopher Pissarides, adding that the BoE’s December rate hike could hit the market. both private request and Chancellor Rishi. Sunak’s desire to support the economy through fiscal policy.
“The extent to which central banks still control inflation is greatly exaggerated,” said Ann Pettifor, economist network director, 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 rising inflation from becoming a permanent feature as businesses and workers in come to expect rising inflation and set their own prices and wage demands accordingly.
This group believed that the BoE had an “unenviable task” and “would fight against an upward drift in inflation expectations”, with a risk that higher inflation could take hold if the pandemic changed the dynamics of the market. labor market, or whether Covid-19 has become 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 “being ready to act now should dampen the propensity for higher inflation to be reflected in expectations.” Melissa 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 regarding growth, inflation and living standards, several respondents tried to stress that the coming year would not be “catastrophic”.
They saw the possibility of a long-awaited rebound in business investment, driven by labor shortages, pandemic-induced digitalization and the need to adopt green technologies. These could “incentivize companies to make the kinds of investments needed to minimize reliance on low-productivity jobs,” according to Nina Skero, chief executive of consultancy Cebr, though she and others have pointed out that real progress in productivity would take years and require a much bigger push from government.
A year from now, however, the state of the UK economy is likely to depend less on developments in inflation or investment than on developments in the pandemic. As Andrew Hilton, director of the Center for the Study of Financial Innovation, has pointed out, a drop in real wages has weighed less on consumers than “the gloom caused by fear of continued lockdowns.”
“Let’s hope for a post-pandemic boom – finally. This is the phenomenon most likely to see 2022 end 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 ahead. “Our economy is an economy that wants to grow,” she said. “As long as people believe the worst of the pandemic is behind us, strong demand will keep the fundamentals in the right direction.”