UK Faces Five Years of Economic Stagnation, Warns Think Tank
The United Kingdom is set to experience a prolonged period of economic stagnation, lasting up to five years, as the government fails to address regional disparities and reduce inequality, according to a prominent think tank. The National Institute of Economic and Social Research (NIESR), based in London, predicts that the country’s gross domestic output will not recover to pre-pandemic levels until 2024. While the overall economic performance will be lackluster, certain regions will be hit harder than others. NIESR projects that real wages in London could grow by as much as 7% over the next five years, whereas the West Midlands, home to Birmingham, the UK’s third-largest city, may experience a 5% drop in inflation-adjusted pay.
NIESR’s director, Jagjit Chadha, describes the situation as “not a very pleasant picture,” attributing the weak economic performance to the combination of a pre-existing structural supply-side weakness, the impact of Brexit, and the strain caused by the COVID-19 pandemic. The forecasts align with the Bank of England’s recent assessment, which also warned of a prolonged period of below-pre-pandemic GDP levels. These projections pose a significant challenge for the ruling Conservative Party as it prepares for a potential general election in 2024. During the previous election in 2019, then-Prime Minister Boris Johnson made “levelling-up” and reducing regional disparities a key promise.
Stephen Millard, NIESR’s deputy director for macroeconomic modeling and forecasting, points to the triple supply shocks of Brexit, the pandemic, and the Russian invasion of Ukraine, along with necessary monetary tightening to combat inflation, as factors significantly impacting the UK economy. He emphasizes that addressing the country’s growth issues remains the primary challenge for policymakers as the next election approaches.
Chadha highlights that the government’s continuous spending beyond its income is constraining growth. This constraint limits Chancellor Rishi Sunak’s ability to offer tax cuts or other incentives to voters ahead of the election. Chadha explains that even at full employment, the UK consistently runs a fiscal deficit, indicating a structural fiscal deficit. The limited fiscal space is due to the reluctance of financial markets to absorb additional debt relative to the country’s lower income levels. Consequently, any incoming government will face difficult questions regarding how to generate growth.
NIESR’s inflation outlook for the UK, which currently stands at 7.9%, is slightly higher than the Bank of England’s projections. The think tank expects the consumer price index to rise at an annual rate of 5.2% by the end of this year, compared to the Bank’s estimate of 4.9%. NIESR predicts a decline to 3.9% by the end of 2024. While the Bank of England foresees inflation returning to its 2% target by the second quarter of 2025, NIESR anticipates an average CPI of 2.3% throughout 2025.
In terms of living costs, NIESR offers some positive news for households struggling with the cost of living. The think tank predicts nominal earnings to grow by 6% in 2023 and 2024. Coupled with declining inflation, this would result in an increase in living standards, with real income growth of approximately 1.4% over the medium term. However, the sluggish pace of overall economic growth contributes to a growing wealth gap between the rich and poor. NIESR forecasts minimal real wage growth for low-income households, who will also face higher levels of debt as essential costs such as food, energy, and housing remain historically high. By 2024, the UK’s poorest households could experience a 17% decline in disposable incomes compared to 2019, while the richest households may see a 5% decrease.
Adrian Pabst, NIESR’s deputy director of public policy, emphasizes that falling real wages and persistent inflation disproportionately affect low-income households. Coping with stagnant or declining real wage growth and persistent inflation has forced many of the poorest members of society into taking on additional debt to cover the rising costs of housing, energy, and food. The implications of these economic challenges are significant and require urgent attention from policymakers.
In conclusion, the UK faces a prolonged period of economic stagnation, with the recovery to pre-pandemic levels expected to take up to five years. Regional disparities and inequality continue to be major concerns, with certain regions experiencing more significant economic setbacks than others. The government’s fiscal constraints limit its ability to stimulate growth through tax cuts or other measures. Policymakers face the arduous task of addressing these economic challenges ahead of a potential general election in 2024. It is crucial to find sustainable solutions to reduce regional disparities and ensure that all segments of society can benefit from economic growth.