Rewind to this time last year and the UK economy was accelerating out of the biggest slump in 300 years. The year-on-year growth rate was 8.7% and there was a sense that the worst of the pandemic was over.
China had reopened its doors to the world and inflation was falling as commodity prices – from copper and oil to wheat and timber – began to tumble.
This week the outlook is very different, reflecting the high cost of the war ravaging Ukraine and the supply chain blockages that can be traced back to China’s return to sporadic lockdowns of industrial centres and ports, blocking global supply chains.
Official figures on Friday showed the UK economy contracted by 0.1% in the three months to June, and the Bank of England expects a long recession to begin in October.
Part of the decline was attributed to the two bank holidays that denied employers the usual number of working days in June. The Bank of England believes the jubilee bank holidays were significant and will be offset by a symmetric bounceback in the third quarter, before a downturn gets fully under way.
Data on the state of the labour market, inflation and retail sales will appear over the coming days and is expected to confirm the Bank’s view that economic output at the moment is flat, and that a full-blown recession will start later in the year.
On Tuesday, job figures are expected to show that a shortage of workers has kept the labour market tight. Unemployment will remain low and vacancies will stay near record highs. Wage growth is forecast by City analysts to have stabilised since May at 6.2%, including bonuses.
The government will attempt to cast these figures as good news that reveals how government policies have supported employment.
But the jobs market is still short of about 700,000 workers, many with crucial skills, whom forecasters expected, in assessments made before the pandemic, to be looking for work in 2022.
Older workers have taken early retirement in droves, while others are still suffering the after-effects of Covid-19. EU workers denied visas have returned home. Younger workers have sought refuge in further and higher education.
This last group will return – better qualified – to seek jobs at some point. What is less clear is how many older workers will want to fill vacancies. Some analysts expect that a jump in the consumer prices index (CPI) measure of inflation will encourage them to look for work.
While the CPI is forecast to remain below double figures in data out on Wednesday, Threadneedle Street officials have predicted that it will soar to 13% in October, eating further into disposable incomes.
The prospect of energy bills, which underpin the rise in CPI, increasing further in January and April next year, is another factor that could prompt some older workers to head back to the office and factory floor.
Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, says a mass return to work is likely to take the pressure off pay. Increases, including bonuses, have already fallen for two consecutive months from 7% to 6.2%.
Pay settlements, mostly agreed by large employers, are another indication that wage rises remain subdued. The median settlement held steady at 4% in June, according to XpertHR, while the permanent staff salaries balance – which offsets those firms offering higher salaries against those offering lower ones – fell from May to June and then to an 11-month low in July.
“These developments should reassure the Bank’s monetary policy committee (MPC) that wage growth is unlikely to get out of hand later this year, even as CPI inflation continues to rise. As a result, we continue to expect the MPC to raise the base rate by 0.25 percentage points, rather than 0.5 percentage points, next month,” Tombs said.
He is one of several analysts to predict that falling living standards will encourage more people who have quit the labour market during the pandemic to take a job.
If this scenario plays out, there will be less pressure on Bank policymakers to raise interest rates next year. This won’t mean we can recreate last years’ optimism, but the recession could be shallower than expected.
