Issue of the week: stagnant Britain
Fears that inflation could become baked into the system have shifted onto the labour market
“It is a sign of the dismal times we are living through”, said The Daily Telegraph, that news of zero economic growth in the final quarter of 2022 “was greeted by many with a sigh of relief”. The UK narrowly avoided a “technical recession” (two consecutive quarters of negative growth). “Instead, it stagnated.” Inflation has hopefully peaked – it has now declined for the third month in a row – but economic activity is still below pre-pandemic levels and “incomes have flatlined in real terms” for more than a decade. “A stagnating country is not a happy place.” We’ve already had a taste of social conflict in the form of battles over public sector pay. Unless the Government can deliver improving living standards, “the situation is likely to get considerably worse”.
New wage figures this week highlighted the dilemma facing policymakers, said Mary McDougall on FT.com. Growth in average regular pay, excluding bonuses, rose to 6.7% in the final quarter of 2022 – slightly stronger than expected. “It feels like a lose-lose situation.” On the one hand, continuing inflation of just over 10% means workers are still losing money in real terms, with public sector workers (with average rises of 4.2%) suffering more than their private sector counterparts (7.3%). On the other, wage inflation is in itself a worrying factor. Falling energy prices may have soothed the Bank of England’s big anxiety that global inflationary pressure could become “embedded” domestically, but a wages spiral in a tight labour market could prove almost as bad. With public sector pay disputes “far from settled”, the Bank of England “will likely be nervous” about these figures, said Kate Andrews on Spectator.co.uk. The Bank’s big fear (and the Government’s) is that if rising wages “bake some inflation into the system”, it will be much harder to get back to the 2% inflation target without further interest rates hikes.
The good news, said Ben Riley-Smith in The Daily Telegraph, is that more people are going back to work. The ONS reports “a record-high movement of economically inactive people into the workforce” in the final months of last year – driven by the young (aged from 16 to 24), and by older workers (between 50 and 64) who took early retirement during the pandemic. The Chancellor, Jeremy Hunt, will put “getting people off out-of-work benefits and into employment” at the heart of next month’s Budget – with policies rumoured to include a “sick note crackdown”. Yet even if the pressure on the jobs market recedes, there’s a way to go before the inflationary impact of lockdowns and the Ukraine War is fully absorbed, said Richard Partington in The Observer. Inflation may have peaked, but “the cost-of-living crisis is far from over”.