The writer is the author of ‘Two Hundred Years of Muddling Through: The Surprising Story of the British Economy’
It’s becoming worryingly easy to use the dreaded phrase “the 1970s” when talking about the British economy. Inflation has been stubbornly high, industrial unrest continues to dominate the news agenda, and all against a backdrop of rising energy prices and a government that seems to be stumbling from crisis to crisis. The presence of advertisements for an ABBA concert, no doubt in holographic form, across the tube network adds to the sense that the UK has stepped back five decades to a time that has become synonymous with economic failure.
However, the comparison, while superficially appealing, is often overstated. Britain certainly has an inflation problem. Headline inflation was still above 10 percent in the UK in March compared with 7.8 percent in Germany or 6.6 percent in France. For two months in a row, the headline rate has stubbornly refused to fall as much as analysts expected. Most alarmingly, core inflation, excluding volatile components such as food and energy prices, remains above 6%, as does service price inflation, which is often seen as the best indicator of internally driven price pressure. All of that will be enough to ensure that the Bank of England feels the need to press ahead with its monetary policy tightening.
But the story has turned from one of rising inflation to one that fails to come down as quickly as expected. It’s far from a comfortable place to be, but at least it’s showing some signs of progress. Few doubt that headline inflation should fall sharply in the coming months as the impact of rising 2021-22 energy prices begins to fade from the numbers.
What will happen to core inflation is less clear. There has been much talk of a 1970s style wage and price spiral. The fear was that workers would raise their wages in an attempt to protect their income but, in doing so, would force companies into a new round of price hikes. Annual wage growth rose as lockdowns eased in 2021 and businesses that reopened struggled to fill vacancies. However, in recent months, as growth has slowed and the number of job openings has decreased, wage growth has slowed. The result has been wage pressure strong enough to raise business costs and core inflation, but not strong enough to protect real household incomes, which have suffered a sharp contraction.
The problem with the easy story of the 1970s is that the job market of the 2020s is not the job market of that decade. Unions are weaker by an order of magnitude: around one in five British workers are members today, compared with more than half at their peak. Legislation in the 1980s and 1990s created a much more liberal labor market. The bargaining power of labor is structurally lower than it was before.
The sad truth is that there is no simple answer to the question “What is ailing the British economy?” Instead, a multitude of interrelated crises are unfolding at the same time. The rise in the world price of energy and all the disruptions caused by the pandemic are of course immediate factors and the UK has been particularly affected by both. In the aftermath of Covid-19, NHS waiting lists for routine appointments and operations rose to around 7 million, an increase of 75 per cent on 2019.
That has become a macroeconomic problem, with 6 percent of working-age people now calling themselves too sick to work. Strikes in transport and the public sector, in response to falling real wages, have also taken on macroeconomic importance with the annual number of lost working days reaching its highest levels since the 1990s.
Then there is Brexit. After the 2016 referendum, many companies canceled or postponed capital spending plans as they awaited clarity on what Britain’s new trade deals would look like. That uncertainty led to a shortfall in business investment. The new trade agreements themselves represent friction on a previously frictionless trade border, weakening long-term productivity and economic growth and increasing price pressures now at the margin.
But the problems also predate 2016. Productivity growth, the main driver of both economic growth and living standards, has been abysmal since 2008. It is this underlying crisis that has left expected real household incomes at mid-2020s no higher than a decade and a half earlier.
On an important level, the 1970s analogy contains important truths. Then, as now, the government was forced to deal with simultaneous crises that required different and often incompatible policy responses. British governments in that decade were overwhelmed not only by rising oil prices and a spiral of prices and wages, but also by half a dozen other problems, from the collapse of Bretton Woods to the boom and bust of the property market. .
The current government now risks being equally overwhelmed by managing the ongoing economic fallout from the pandemic at the same time as an energy price crisis, along with Brexit, against a backdrop of 15 years of weak growth and with the challenge of net zero transition ahead. The real sentiment of the 1970s for politicians is one of almost constant firefighting.