Economists predict that political uncertainty and Brexit will slow the UK’s recovery in 2022

The UK’s economy recovering from the pandemic in 2022 will lag behind other developed countries. Economists surveyed by the Financial Times predict that the UK will be hindered by political uncertainty and the lingering legacy of Brexit.

Among the nearly 100 economists, most said that the standard of living in the UK will deteriorate in the coming year, and poorer households will be most affected by soaring inflation and tax increases.

They believe that the biggest challenges facing the country’s economy are global: high energy prices and broader pandemic-related inflationary pressures; persistent labor shortages and supply chain disruptions; persistent waves of viral infections; and increasing climate change risk.

But many people believe that the UK will have a harder time dealing with these shocks than other countries because financial support is dwindling, Brexit is disrupting trade and exacerbating supply bottlenecks, and political uncertainty seems increasingly likely to hinder investment.

Jagjit Chadha, director of the UK’s National Institute of Economics and Social Studies, said: “The unfavorable advantages and political uncertainty of Brexit will continue to hinder the otherwise strong recovery.”

“The recovery is driven by optimism about the future… Brexit will cause long-term pessimism on the future of the British economy,” said Paul de Grauwe, a professor at the London School of Economics.

On the surface, this pessimism seems a bit overdone: Several interviewees stated that the growth rate of UK GDP in 2022 should exceed or at least match the Eurozone, even if stimulus measures may boost the United States. Expand faster.

Kallum Pickering, senior economist at Berenberg, stated that consumers have benefited from “record high net worth, a booming labor market, and large excess savings,” while companies have firm investment intentions.

But Paul Dale, chief British economist at the consulting firm Capital Partners, described the strong growth as a “statistical mirage caused by the pandemic.” He and several others pointed out that the British economy has rebounded faster because it has fallen into a deeper pit, and the GDP level has not yet returned to the level of 2019.

With the full implementation of customs controls in the United Kingdom in 2022, many people say that Brexit will intensify trade frictions related to the pandemic, supply chain obstructions and labor shortages will last longer than other countries, and inflationary pressures will be more pronounced.

Independent consultant John Llewellyn and asset manager and former Bank of England interest rate setter Sushil Wadhwani said that this will force the Bank of England to tighten monetary policy more than other central banks. Over time, the recovery of the United Kingdom relative to other countries will slow down.

Although some have praised the government’s handling of the pandemic in the past year—especially the speed with which the vaccine is introduced—there is little confidence that ministers will continue to support the economic recovery.

Wadhwani pointed out that the government is clearly “unwilling” to help companies affected by the Omicron coronavirus variant, while Barret Kupelian, a senior economist at PricewaterhouseCoopers, mentioned “imminent tax increases.” According to Morten Ravn, a professor at University College London, The high public debt means that it is “difficult to design stimulus measures or major tax reforms”.

For others, the government itself is the core part of the problem. A series of scandals weakened Prime Minister Boris Johnson’s poll ratings and sparked the specter of leadership challenges. Survey respondents mentioned “unstable politics” and the lack of reliable plans to increase long-term productivity.

Panicos Demetriades, a professor at the University of Leicester and former governor of the Bank of Cyprus, predicts that Brexit and Johnson’s “arbitrary, if not chaotic government style” approach will Being questioned. Pickering said that Johnson’s potential leadership challenges may “encourage companies to maintain a’wait and see model’ and postpone investment decisions until the outlook for economic policy becomes clearer.”

However, a problem not created by the government will determine the prospects for household living standards in the coming year: inflation.It hit 5.1% in November, This is the highest level in more than a decade and will soar in the first quarter of this year, and is well above the 2% target set by the Bank of England at the end of 2022.

Almost everyone who responded to the survey said that this will make people’s situation worse at the end of the year because average wages cannot keep up with rising prices and taxes.

A line chart showing changes in annual percentages by forecast date shows that economists are raising their inflation forecasts for 2022

Independent consultant John Philport said: “Regardless of the course of the 2022 pandemic, most of us are likely to encounter serious financial problems.” He added that workers in shortage of occupations, or those who have drastically increased from the statutory minimum wage Workers who benefit from the rise will be in relatively better condition, but if the unemployment rate remains stable, most people will not have enough bargaining power to ensure real wage growth.

CBI Chief Economist Alpesh Paleja said: “We will face wage austerity again for most of the next year, which will particularly hit low-income families.”

Some interviewees said that despite wage tightening, households will continue to spend because they can use the savings accumulated during the lockdown, and Chatham House researcher DeAnne Julius said if Wage growth is concentrated in low-income groups where labor shortages are most pronounced, so “many people will feel better than they are now.”

The bar chart of the percentage of respondents shows that economists expect the UK economy to experience high inflation, labor shortages and poor trade performance

But Melanie Baker, an economist at Royal London Asset Management, warned that for workers in industries affected by Omicron, the start of the year has been terrible because there are no vacation plans to support loss of income.

Professor David Bell of the University of Stirling said that the living standards crisis will be “serious” for poor families because they have a higher proportion of energy income. Dave Innes, economic director of the Joseph Rowntree Foundation, said support for millions of people unable to work due to illness or disability will be at the lowest level since 1990.

However, although there is almost consensus on the bleak outlook of household finances, there are widely differing views on what measures the Bank of England can or should take to avoid the cost of living crisis.

One group believes that monetary policy makers are powerless to respond to soaring inflation. This is mainly because the pandemic disrupts supply while shifting demand to commodities-no matter what measures the central bank takes, this pressure will be relieved by the end of 2022.

“Current inflation is not a monetary phenomenon… To me, the biggest impact on prices seems to be the adjustment of relative prices, which has to go with the flow,” Christopher Pissarides, professor at the London Stock Exchange ) Said, adding that the Bank of England’s December rate hike may hit private demand and Chancellor Rishi Sunak’s willingness to support the economy through fiscal policy.

“The degree of the central bank’s’control’ of inflation has been exaggerated,” said Ampettifo, head of the Macroeconomic Policy Research Economist Network.

But another group said that the Bank of England should be prepared to raise interest rates as it started to prevent rising inflation from becoming a permanent feature, as companies and workers began to anticipate inflation growth and set their own prices and wage requirements accordingly.

This group believes that the Bank of England has an “enviable mission” and will “fight the upward drift in inflation expectations” if the pandemic changes the dynamics of the labor market, or if Covid-19, higher inflation may change It has become entrenched as an endemic epidemic, and each new wave of infections will cause fluctuations in the demand for goods and services.

Kate Barker, a former member of the Monetary Policy Committee, stated that “being ready to act now should curb the tendency of rising inflation to be included in expectations”. Redburn chief economist Melissa Davis said that the challenge for the Bank of England will be to “make the right judgment between maintaining its credibility now and not undermining the 2022-23 recovery.”

Although generally pessimistic about economic growth, inflation and living standards, several interviewees pointed out bitterly that the coming year will not be “all doom and pessimism.”

Due to the scarcity of labor, the digitalization triggered by Covid, and the need to adopt green technologies, they see room for the long-awaited rebound in business investment. Nina Skero, chief executive of consulting firm Cebr, said these may “push companies to make the necessary investments to minimize reliance on low-productivity jobs,” although she and others emphasized real productivity gains. It will take several years, and it will require greater push from the government.

The line chart of the forecast date and annual percentage change shows that economists are lowering their economic growth forecasts for 2022

However, one year from now, the state of the British economy may depend more on the course of the pandemic than on what happened to inflation or investment. As Andrew Hilton, director of the Financial Innovation Research Center, pointed out, the impact of falling real wages on consumers is less than “the pessimism caused by the fear of continued lockdowns.”

“Let us hope for prosperity after the pandemic — finally. This phenomenon is most likely to end in an optimistic manner in 2022,” said Diane Coyle, a professor of public policy at the University of Cambridge.

Kitty Ussher, chief economist of the Board of Directors, also predicts that the future will be better. “We are an economy that wants to grow,” she said. “As long as people believe that the worst of the pandemic is over, strong demand will move the fundamentals in the right direction.”

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