The Bank of England, famous for being over-optimistic when it comes to predictions around economic growth and ‘cautious’ when it comes to RPI, CPI, inflation or anything else detrimental to the nation’s prosperity – has finally admitted what some political commentators (like EC) months ago.
The British economy is being battered from all sides. Household incomes will not do as Boris Johnson and his cabinet were suggesting – that Brexit was causing rapid wage rises. Reality is beginning to set in – we are in for a really rough ride over the coming years.
Rishi Sunak will have you believe that the country is facing a short-term shock – confirmed by his ‘pledge’ to reduce income tax by 1p by April 2024. This is also nonsense. The evidence comes via Sunak’s cynical attack on young people by doubling the amount they will pay for an average priced university degree. From next year, a graduate will no longer pay £47,000 over 30 years but £100,000 over 40 years.
The Bank of England boss Andrew Bailey, now says Britons are facing an “historic shock” to their incomes this year.
This was not hard to work out. Sparked by surging energy prices that will hit UK economic growth and consumer demand along with Russia’s invasion of Ukraine – both will fuel the UK cost of living crunch. Bailey also said the energy price shock of 2022 would be larger than during any single year in the 1970s.
A month ago (which is a long time to predict anything nowadays), the Economic Times editor published an article entitled “The outlook for the global economy – Stagflation.” For those countries that we are economically concerned about – our own included, we forecasted ‘stagflation.’ It is the worst of all worlds when it comes to maintaining standards of living.
It is here that the Bank of England governor finally sounded the alarm on stagflation, suggesting slowing economic growth and soaring inflation posed the biggest challenge to the central bank’s Monetary Policy Committee since its creation in 1997. UK consumer price inflation has now reached a 30-year high of 6.2 per cent in February, more than three times the BoE’s 2 per cent target. It’s only going to get worse and may well hit close to double digits by the early part of next year.
Bailey said Britons were facing a “very large shock to aggregate real income and spending” from rising prices of energy and imported goods. “This is really an historic shock to real incomes.”
On top of this, Bailey did not mention the unfolding disaster that Brexit is presenting. All advanced economies in the world have recovered from the pandemic in terms of exports. Britain’s performance is not just ‘lagging’ behind a bit – but has dramatically fallen off the cliff. The former has increased exports of somewhere between 105 to 108 per cent of pre-pandemic 2019. Britain is somewhere between 86 and 90 per cent. It’s the same story with trade intensity (all exports/imports). Maximum performance of a G7 country is officially recorded at 107 per cent, the minimum is 96 per cent – Britain limps behind at 86 per cent.
Last week, the Office for Budget Responsibility, Britain’s fiscal watchdog, predicted that UK household real income this year would contract at the sharpest rate since records began in the 1950s. The OBR has since slashed its UK growth forecast for 2022 from 6 per cent to 3.8 per cent. We expect that figure to fall further by the year-end as households tighten their belts in the expectation that the cost of living crisis will still be felt in wealthier households. By then, Brexit will be delivering its full negative impact and global inflationary pressures will be building towards its peak.
One final truth about the British economy comes from the Chancellor. The FT reports that – “Sunak said a 1 percentage point rise in inflation and interest rates could “wipe out” the headroom he had built into his tax and spending plans in the run-up to the next election.” It is true that such a low figure i.e. 1 per cent would have that impact – it is also true that the next election is the only thing Sunak is worried about, not managing the economy for the greater good or the prosperity of the country.