Economy in brief: June 2023

UK economy: too hot to handle?

As we look to the second half of 2023, it’s a good time to take stock of economic performance to-date and consider how the outlook is shifting. We recently put out our latest forecast for the UK and global economies, in which we’ve upgraded growth for this year to +0.4% (from -0.4% previously) and to 1.8% for next year (from 1.6% previously). Unfortunately, the downside of this better growth, is that it is driving up inflation. The lower level of gas prices and lower supply chain disruption have provided a tailwind for business confidence and spending this year, supporting consumer spending, employment and wages. The downside is that, without material additional supply side capacity coming on stream – from the labour market in particular – the higher rates of activity have stoked domestic inflationary pressures further forcing the MPC to raise rates by 50 basis points in their most recent meeting.

UK growth: both too high and too low

Weak growth in the UK and the apparent necessity for higher interest rates are uneasy bed fellows. Household incomes in real terms fell 1.7% last year and we’re forecasting that they’ll fall again this year, going from being eroded by high inflation to being constrained by higher interest payments on borrowing. Businesses will likewise go from feeling pressure from higher energy costs, supply chain inflation and high labour costs, to higher borrowing costs, lower demand and still high labour costs. The overarching challenge is the UK’s supply potential, i.e. the capacity of the economy to grow without generating inflation. The UK has experienced a number of significant shocks to its supply capacity in recent years, the impacts of which have significantly eroded its potential to grow without driving up inflation. The “trade intensity” of UK growth, i.e. exports + imports as a % of GDP, has drifted down relative to G7 counterparts since 2012, and may be contributing to the UK’s productivity malaise. The level of migration into the UK has continued to be relatively high, but its composition has changed, making it difficult to unpack what the impact has been on skill availability at a macro level.

Nonetheless, there is a concern that the composition of inward migration is no longer as efficient in supporting employment as it was in past years. And then post-pandemic, the significant increase (442 thousand in the latest data) in the number of working age people who are outside the active labour market due to sickness has significantly affected worker availability: despite a weaker economic environment starting to bring down vacancy levels, there is only one unemployed person per vacancy against an average of 3, contributing to private sector regular earnings growth of 7.6% on the year.

It’s already time to prep for the Autumn Budget

We’re already looking to the Autumn Budget to refine the policy recommendations needed to get the UK on a firmer footing to deliver sustainable growth. We’ll be running roundtables with members to refine our recommendations over the summer in a range of areas, including on labour market activation, infrastructure delivery, green competitiveness and the role of AI in the economy. And as a politically neutral organisation, we’re engaging across the political landscape as we look to the next general election. If you’d like to get involved, please email [email protected].