The UK is set for five years of “lost economic growth”, with the poorest hit hardest, a think tank has warned. The National Institute for Economic and Social Research said a triple blow of Brexit, Covid and Russia’s invasion of Ukraine had badly affected the economy.
It added that the spending power of workers in many parts of the UK will remain below pre-pandemic levels until the end of 2024. The BBC has contacted the Treasury for comment.
The amount of money made by the UK economy, its gross domestic product – or all the goods and services produced – is not forecast to return to 2019 levels until the second half of next year, Niesr forecast. This weak “stuttering growth” over a five year period has widened the gap between the wealthier and poorer parts of the country, the think tank said.
In London, real wages are expected to be 7% higher by the end of next year than they were in 2019 – whereas in regions such as the West Midlands they are forecast to be 5% lower, its analysts said. Despite pay increases, high inflation has forced up prices and the rising cost of living has left households throughout the UK feeling squeezed.
Niesr forecasts that inflation, the rate at which prices rise, will remain continually above the Bank of England’s 2% target until early 2025, meaning the cost of living will also continue to rise. Inflation is currently 7.9%.
The Bank, which is tasked with keeping inflation under control, said last week it expected to meet its own target of 2% by early 2025. As a result, people’s wages, when taking inflation into account, would be below the level they were before the pandemic until the end of next year in “many UK regions”, the think tank said.
Prof Adrian Pabst, deputy director for public policy at Niesr, said low-income households would be hit hardest, with real disposable incomes in this group falling by about 17% over the five years to 2024.
“For some of the poorest in society, coping with low or no real wage growth and persistent inflation has involved new debt to pay for permanently higher housing, energy and food costs,” Prof Pabst said.
Last week, the Bank of England put up interest rates for the 14th time in a row as it continued with its efforts to make borrowing more expensive, dampen demand and therefore slow inflation.
The Bank also signalled it would keep interest rates higher for longer, projecting that inflation would fall below 5% this autumn or winter.
But not all economists agree that the Bank should be raising rates when many households and business are struggling financially. Raising rates too aggressively could push the economy into recession, which is defined typically as when it shrinks for two three-month periods – or quarters – in a row.
Niesr said it expected the UK to avoid going into a recession this year, but said there was a “60% risk” of one by the end of 2024.
The Bank has said the UK will not enter a recession, but has forecast growth to be limited and unemployment to rise.
A growing economy generally means there are more jobs, companies are more profitable, and pay packets grow. Higher wages and larger profits also generate more money for the government in taxes that can be spent on public services.
Prof Stephen Millard, deputy director for macroeconomic modelling and forecasting at Niesr, said the “supply shocks” of Brexit, Covid, the Ukraine war and rising interest rates had “badly affected the UK economy”.
“The need to address the UK’s poor growth performance remains the key challenge facing policy makers as we approach the next election,” he added.