UK heads for five years of lost growth as levelling up fails

Little real wage growth is forecast for low-income households. Picture: Hollie Adams/Bloomberg

The UK is headed for five years of lost economic growth as the government fails to “level-up” the country’s regions and reduce inequality, an influential think tank says.

Gross domestic output is unlikely to return to its pre-pandemic level before 2024, according to forecasts from the London-based National Institute of Economic and Social Research.

While output across the country will be lacklustre, NIESR said, some regions will feel a sharper pinch. In London, it expects real wages will grow by up to 7% in the five years from the end of 2019 — but in the West Midlands, home to Britain’s third-largest city Birmingham, NIESR is projecting a 5% drop in inflation-adjusted pay.

“It’s not a very pleasant picture,” NIESR’s director Jagjit Chadha said. “What we have is an economy that went into covid with a weak structural supply side as well as having just affected Brexit, breaking relations with our nearest and richest trading neighbours.”

The forecasts echo the Bank of England’s gloom, which said last week that GDP would remain below pre-pandemic levels “in the medium term.” Both projections are a worrying omen for the ruling Conservative Party as it prepares for a potential general election in 2024. At the time of the last vote in 2019, then Prime Minister Boris Johnson made “levelling-up” to spread prosperity beyond London one of the key promises.

“The triple supply shocks of Brexit, Covid and the Russian invasion of Ukraine, together with the monetary tightening that has been necessary to bring inflation down, have badly affected the UK economy,” said Stephen Millard, NIESR’s deputy director for macroeconomic modelling and forecasting.

Addressing the UK’s growth issue “remains the key challenge facing policymakers as we approach the next election,” he said.

Tax cuts

Growth is being constrained by the fact that the government is now continually spending more than its income, Chadha said. He said that reduces the scope for Sunak to offer tax cuts or other sweeteners to voters ahead of the election.

“Even at full employment, we’re regularly running a fiscal deficit, which implies to us that we have a structural fiscal deficit,” he said. “As the fiscal position is constrained, because the financial markets don’t want to absorb more debt relative to our lower level of income, the room for manoeuvre will be limited.” 

Any incoming government would have to answer some “very hard questions” on how it’s going to generate growth, Chadha added.

NIESR’s outlook for inflation in the UK — which is currently almost four times its target at 7.9% — is slightly higher than the BOE’s. It expects the consumer price index measure to be rising at an annual rate of 5.2% by the end of this year, compared to the Bank’s 4.9%, and to fall back to 3.9% by the end of 2024.

While the BOE’s forecasts pencil in inflation falling back to the 2% target by the second quarter of 2025, NIESR thinks CPI will still average 2.3% across 2025 as a whole.

Cost of living

There was some good news for households struggling with the cost of living. NIESR thinks nominal earnings will grow by 6% in 2023 and 2024. That, combined with falling inflation, would mean a rise in living standards, with real income growth of about 1.4% over the medium term.

But the broader economy’s tepid pace of growth is one of the factors feeding a gap between the rich and poor, NIESR said.

It predicted little real wage growth for low-income households, which also will have to shoulder higher levels of debt as food, energy and housing costs remain historically high.

By 2024, the UK’s poorest households could be facing a shortfall in their disposable incomes of 17% relative to 2019, compared to 5% for the richest households, the think-tank predicted.

“Falling real wages, combined with persistent inflation, are hitting the low-income households hardest,” said Adrian Pabst, NIESR’s deputy director of public policy. “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.”

Bloomberg