BU's Emeritus Professor Nigel Jump writes the next in a series of economic blogs.
UK living standards are not keeping pace with those in other ‘developed’ economies. Accompanying the budget, the OBR warned that real incomes per head will still be below pre-pandemic levels in 2027-28. Several of our ‘rivals’ are above their equivalent points already. By 2027/28, if the OBR is right, we will have endured 20 years of subdued real incomes, wages and GDP per head (in both absolute and relative terms). Recently, the UK has ranked 28th of 34 OECD countries with respect to earnings growth.
This comparative weakness underlines a range of current post-pandemic labour disputes. Fundamentally, however, it reflects a number of factors that mean a poor productivity (levels and growth) record, resulting from weak systemic investment (infrastructure, innovation and skills) and subdued dynamic effort (entrepreneurial competitiveness) ever since the 2008 financial crisis. Moreover, several years into Brexit, the predicted risks to trade are occurring whilst the potential opportunities to grow in internal and new foreign markets have been stymied by the pandemic, Russia’s war and relatively high inflation. We are hoping for a turning point in 2023 but, to date, ‘stagflation’ (low growth and high inflation) remains the main macroeconomic concern.
The current policy response is threefold:
Running large fiscal deficits and an accumulation of public debt (to an unsustainable level - almost unprecedented relative to the size of the economy) in order to bolster short-term demand.
Pushing up interest rates to dampen inflationary growth.
Promoting industrial strategies to boost capacity and ‘level up’ the regions.
This all sounds fine but, as always, the devil is in the detail, especially on timings. Will a turnaround come quickly and will it be widespread? Key questions need to be answered:
On 1), is the actual and predicted debt (around 100% of GDP) manageable in the near term and reducible in the long run?
On 2), how high will rates have to go (latest base of 4.25%, still negative in real terms) to get on top of ‘stagflation’ and does the Bank of England have sufficient eye on money supply trends (+4% year to January) and financial stability (in light of the SVB+Credit Suisse crises)?
On 3), what are the priorities for de-centralisation of competitiveness and investment to the regions; what and who are the feasible technological ‘winners’ for UK PLC; and where are the future markets we need to engage with?
Right now, it is not possible to answer these questions with any certainty:
Events happen, including elections and other political traumas. The only certainty is the Treasury’s budget forecasts, as framed by the OBR, will be wrong. It is hard to judge in which direction reality will push us. The difficult goal of falling debt ratios and tax cuts for the mid-2020s is desirable, but fragile.
The current betting is that rates will go higher but not much (5%? - still not back to ‘normal’ positive real rates). Inflation may be dropping later this year, but it is hard to see a return to the 2% target without further broad economic restraint. The banking system is probably not going to collapse but it may need further support if a ‘secondary banking crisis’ evolves into something worse.
Eventually, the decision to join the CPTPP may help but it will amount to ‘small macro beer’ and some ‘micro disruption’ for now. Moreover, Free Ports and Investment Zones and other levelling measures have a mixed history of success. Worryingly, there is a risk that some of the best ‘new’ markets will be politically ‘unsavoury’ ones.
At best, these steps will take years to bear sustainable fruit in terms of new output and jobs. The state has a poor record of ‘picking winners’, with regard to sectors, technologies or places (for new markets and location). The balance between state intervention and ‘getting out of the way’ to let private initiative blossom is difficult to strike. UK governments have a poor record of commitment and delivery to regional development policies for infrastructure. (Whether you are a fan or not, HS2 may become just the latest in a long line of unfulfilled projects going back at least as far as TSR2 in the 1960s.)
Against this background, the economy remains vulnerable to adverse news. There is still a need for businesses to make contingencies for recession shocks, but, there is also hope for an investment-led bounce. Good times or bad, there is always potential for ‘winners’ who invest for future growth and profitability based on a sound assessment of shifting markets and technologies: investments that capture the future value of particular products and services. Private and public co-operation on shared goals or aims is key for future competitiveness and, ultimately, well-being.
