BU’s Emeritus Professor Nigel Jump writes the next in a series of economic blogs looking at the impact of covid-19 on the economy.
Era of Stagflation
We are in an economic era of stagflation (persistently lower than trend growth with higher than trend inflation) set in an era of disruptive politics.
The UK economy slowed down in the first half of 2022. Maybe, it even turned negative: ONS estimates a 0.3% decline of real GDP for April. The inflation rate soared towards double figures: +9.1% CPI year to May - (with input and output prices already rising at much higher rates than this - 22% and 16% respectively). Unemployment is statistically low (3.8% February-April) but labour problems abound, with skills shortages, unfilled vacancies, higher inactivity and low productivity.
Business surveys have turned less optimistic and household confidence has waned (latest GfK index was -41 in May = the lowest ever recorded). Discretionary consumption seems to be under pressure as consumers with falling real incomes divert more of their scarce resources to essentials like fuels and foods. Business investment is, at best, flat (despite Treasury measures, it was still 9.2% below pre-pandemic levels in Q1 2022) and much weaker than amongst our competitors. Net trade is deteriorating (provisional current account deficit of 7.1% of GDP in Q1 is historically unsustainable), especially as the Brexit spanner of non-tariff barriers, supply chain mistrust and bureaucracy, blocks up the works.
The UK’s absolute and relative economic performance has weakened, leading to downward pressure on share prices, other asset values and the pound sterling. The Bank of England has raised base interest rates further, but only to 1.25% so far, and the money supply is still growing too fast. There is not yet enough monetary constraint to quell inflationary pressures but still a risk of a debt or real income induced recession. Base interest rates may well need to more than double.
There are strikes, blockages and other disruptions affecting transport and travel, professional services and many product/component supplies. The pandemic is picking up again (here and elsewhere) and the war in Ukraine, and its wide repercussions, are looking more like prolonged negatives for economic activity, particularly foodstuffs. Finally, domestic politics is in turmoil, with increased threats to the Union, controversy over the PM and his government, and a pronounced cost of living crisis.
Against this background of stagflation and disharmony, it is hard to spin a good economic outlook for the rest of 2022 and into 2023: slow growth and high inflation are expected.
Aspects of Development
It seems that local businesses and households face a difficult winter. Whilst many companies say they are busy right now and keen to hire good staff, most of them are wary about the future. Professional forecasters at every level, from the IMF, through official and commercial bodies, to local business groups, suspect a recession is coming for the UK and many of its partners, crucially the USA. Indeed, the historical argument would probably be that it is hard to squeeze out an inflation spiral without a period of output contraction. The hope is that the downturn can be short and sharp, that monetary, fiscal and trade policies can create incentives for recovery and that, therefore, ‘bear’ financial markets are short-lived.
Much depends on how quickly the central banks get inflation under control through higher interest rates and decelerated monetary growth (quantitative tightening). The rest depends on government incentives for investment-led growth generated by business and personal taxation, productive infrastructure spending, and regionalism: the levelling up agenda.
Once again, we rehearse the basic development mantra. Regional development is about investment in capacity that boosts entrepreneurship and competitiveness by encouraging innovation and fostering skills. Thereby, development builds productivity and resilience in ways that support a return to sustained growth, increasing real incomes and well-being whilst conserving environmental resources. Higher productivity levels and growth remain the only sustainable route to people feeling better off and to a country that is able to address its distributive goals.
At a local level, this means a focus on spreading ‘best practice’ across the industrial, business and regional landscape. It is about finding profitable markets, developing better products and services, investing in new premises and technologies, and hiring and training staff. It is about efficiency and effectiveness, and in minimising, but not eliminating, risks in terms of cost control, price competitiveness and trade shares. It is about managing finances and environmental impact, recognising the high extent of economic uncertainty at this time and mitigating that in the months ahead.
It is probable that more ‘zombie’ firms will find it hard to continue, leading to a rise in insolvencies, liquidations and unemployment. It is possible that the housing market may retrench, and the visitor, hospitality and transport sectors may face a softer trading period. It seems likely that manufacturers and business services will struggle to maintain growing order books, especially internationally. Public sector services, including health and education, are being stretched and agriculture and other primary industries face significant structural change. There are winners, such as windfall gains for energy and some other ‘vital’ sectors, but stagflation hurts most, especially those on low and/or fixed incomes (including many pensioners) with little or no power to protect living standards.
Stagflation is an ugly word for an ugly time of economic development. In the form of strong businesses and robust households in diverse industries and supportive communities, the local economy has some resilience. We will get through this. But, facing a difficult environment for activity and exchange, based on falling real incomes and supply chain disruption, means a need to prepare for hard times.
The innovative and the competitive will survive the downturn. They can prosper when the eventual recovery gets underway. Until then, the drive for growth based on higher productivity must continue, framed by a solid defence of investment in infrastructure and skills, and combining it with a bold attack of innovation and entrepreneurship.
Stagflation suggests a difficult period ahead for local economic development but also suggests an era in which strengthening the foundations of local development is even more vital. This requires a positive macro policy framework and productive micro actions by both private and public economic actors. Businesses and workers, agencies and communities, and investors and consumers need to bolster short term defences whilst planning long term strategies for attack.