Dorset Economy blog 53: Post Budget, Pre-election… Easter Economics

BU's emeritus Professor Nigel Jump writes the next in his series of blog on the Dorset economy.

Current UK data shows (see first table below):

• Output is flat or worse: with a technical recession in the second half of 2023.  January was a bit better, but will that be sustained?  Importantly, real GDP/head has fallen for 7 consecutive quarters and remains no higher than it was pre-pandemic.
• Aggregate prices are still rising too fast: inflation is undermining many economic variables and decisions, but the rate of price increase is decelerating.  Base interest rates should remain at 5%+ until inflation settles through the target because this will retain ‘useful’ signals on rates of return to investors and savers.
• Jobs are available but vacancies may be softening.  Real incomes are still under pressure from the cost of living.  Can inflation be brought down to target without a rise in unemployment?
• The PMI regional surveys reinforce the view that the South of England economies are very mixed by sector, albeit flat overall.

RGDP = real gross domestic product CPIH = consumer inflation including housing
PMI = purchasing managers' index-survey of regional activity. Sources ONS & SPGlobal

The latest OBR forecasts, stemming from the March Budget, suggest (second table):

• Output growth will remain relatively sluggish compared with UK competitors and pre-2008 UK history.  Growth is still expected to be slower than desirable in 5 years’ time.  Can growth potential be pushed back above 2% pa?  We really need 3%+.
• Price inflation will pass through the 2% target soon and then will tend to be below or around that rate for several years.
• Unemployment will not rise sharply, peaking at 4.4% over the next year or so.
• For the foreseeable future, public debt stays at a peace-time high of 90%+ of GDP -fiscal constraint remains inherent.

OBR March 2024

There’s quite a lack of forecasting braveness out there, backed by some wishful thinking.  This is also seen in the Treasury’s Comparison of Independent Forecasts (February 2024).  This consensus suggests a weaker immediate path of 0.4% RGDP growth in 2024 and 1.2% in 2025.  CPI average forecasts are higher: 2.9% and 2.1% respectively.  Unemployment is also higher at 4.5% and 4.6% respectively.  Most forecasters appear to believe that we are still living through the tail-end of the post-pandemic and war-strewn period of ‘stagflation’.

The March Budget, though a little more positive than the Autumn Statement, did not change the essentials of the macroeconomic outlook.  The Chancellor emphasised the need to increase sustainable productivity, seeing this goal as the main driver of his hopes for his new measures on taxes and investment.  Still, the OBR forecasts GDP/head to reach a peak growth rate of no more than 1.5% in 2026. 

All the main forecasters, then, have a uniform view of a modest outlook for growth, inflation and jobs.  Cast in these doldrums, the UK economy is vulnerable to further shocks.  Given the uncertainty about events in Gaza and Ukraine, and about elections at home and in America, this suggests a cautious view should be adopted about the near future risks (2024-26).

There may be, however, more upside for the medium term (2026-28).

• First, real incomes may start to adjust as the ‘cost of living’ eases quicker than wages. 
• Second, the investment tide may be turning, led by technological and environmental change.  

In 2016, post-referendum, I suggested that it might take ten years for the economy to rebalance itself after Brexit.  In a few years, then, might we observe a more positive adjustment?  Higher and growing productivity remains key to this hope.  I am not calling a significant recovery yet but, barring accidents, it is no longer out of the question after another year or so of transition.  The Chancellor talked about a Laffer Curve being out there (lower taxes yielding more revenue) – more wishful thinking!?

With respect to a medium-term recovery, the Budget was important but modest.  Hence, the financial markets reacted little, if at all.  (The Bank of England MPC meeting in March, which hinted at lower interest rates later this year, was more closely listened to.)  Anyway, from its Autumn view, the OBR promised better incomes and outputs and better government finances and inflation.  Is this modest progress good enough?  After the forthcoming election, will the next government follow a similar or stronger macroeconomic plan?

The further reduction in National Insurance contributions and the Public Sector Productivity Plan are welcome.  But the overall increase in the taxation burden offsets the NI positive and a good return on the PSPP assumes the workforce increases, with more becoming active.  Do the inactive and immigrants have the skills and health to fill our labour gaps as hoped?  Will AI and ‘green’ productivity boosting measures be introduced efficiently and effectively, especially in the public sector?  If not, HMT’s supposedly self-reinforcing growth incentives will fail, once again.

New investments in infrastructure and skills remain paramount for creating more entrepreneurial competitiveness.  Leading politicians, on both sides, are promising more stability.  That is positive, but not sufficient.  The holy grail of a better productivity performance remains to be found and secured.  It is a task for the nations’ statespersons to grasp, driving an historic mission statement, this Easter and beyond.