High inflation and low growth new normal?
The UK is suffering from Brexit-related inflation, supply shock energy and covid, with pent-up demand causing rising inflation, weak pound adds to the woes. Together this toxic mix is starting to lead to slow growth and high inflation. Strange mix of disinflationary and inflationary pressures, shocks to the economy. Bank of England has few options, unable to reduce global energy inflation.
Simple narratives often the big picture. Fear is wage price spiral of the 1970s returns. That ignores the weak wage growth over the past decade, poor productivity that is plaguing UK. Major wage correction is required with big increases at the lower end. Public sector needs huge wage increases to keep staff. Already seeing some wage growth but that being outstripped by inflation. Companies finding keeping staff and hiring just as difficult. UK has far too many cars hand washes and little business investment.
Workers in the public sector are demanding higher pay or face strikes. Bank of England is warning workers not to seek higher wages or face fueling inflation. Misremembering what happened during the 1970s. Tories are stuck in thinking the answer comes from supply-side reforms when demand needs to be supported. A bunch of structural issues facing the UK, the housing market is sucking economic activity. Housing market is draining output as many are paying mortgages or funding retirement pots.
Simple narrative companies are greedy or workers are ignoring the complicated backdrop. No easy answers to solve the problems facing.
Northern Ireland protocol by design has created a sea border between it and UK. Closer alignment between the UK and EU would solve the issues. Border must be somewhere, some improvements but sea border must remain. Eurosceptic MPs are unlikely to support closer alignment, pragmatic thinking is dead. Scope for minor changes to be made but promises made for Eurosceptic can’t be kept. Most of the problems have been created by Boris Johnson’s own short-term thinking. Only cliff edges remain as solutions which lead us to a potential trade war with the EU. Not exactly smart to do during a period of high inflation with a weak pound.
Domestically Boris Johnson is weak and lacks the political capital or leadership to find a solution. Northern Ireland assembly DUP is blocking the appointment of a speaker. Local elections saw the DUP becoming the second-biggest party not the first. The government can’t be restored after a certain period election must be called again. DUP is demanding the Northern Ireland protocol be scrapped before they even consider coming back to the table. The UK is refusing protocol dispute resolution, recognizing European institutions would be toxic politics. EU position is renegotiation off the table, but the scope for changes once the UK implements the protocol in full. Without a change of leadership within Westminster, the deadlock looks safe to continue. Boris’s administration looks to be on its last legs, unlikely to command support within the commons. The only way forward looks to be reforming how the assembly works but Boris is refusing to listen to anybody.
The oil price had already been increasing, world reopening needed more oil as demand came back. Supply shock caused by covid would take years to resolve. The Russian invasion of Ukraine has caused energy prices to jump. Putting further pressure on supply chains, various raw materials being restricted by trade sanctions. Food prices are jumping in price, some nations are restricting exports. All of this adds to inflationary pressures facing the global economy. Energy prices rising have a disinflationary effect on demand. Growth slowing down across the world.
A weak pound causes imports to rise in price, exports should benefit but trade barriers. The labour market looks tight but ill health, and early retirement having less access to workers from the EU cause major headaches. The UK risks destroying its educated labour force with funding cuts and no retraining plan. No plan to get people back into the labour market.
Slow decline is far more likely over sudden bang but economy is looking rather sick. Wave of deregulation or supply side reforms won’t suddenly make things better. Tories no longer the party of business but stagnation suits homeowner base. High inflation could be new normal for the UK and low growth.