Boris Johnson isn’t worried about the UK economy. He should be

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To bolster his argument, the prime minister has made bold but narrow claims about the strength of the UK economy, the benefits of wage growth and the level of investment. A broad look at the UK economy paints a very different picture.

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Johnson appeared on the BBC on Sunday, defending his economic record as his Conservative Party annual convention was underway. The Prime Minister talks to his party loyalists on Wednesday.

The United Kingdom is the “fastest grower” of the G7 group of the world’s most advanced economies, Johnson said as he faced questions about fuel shortages that have now lasted more than a week.


Strictly speaking, the claim may be true. According to the latest estimates from the International Monetary Fund, the UK economy is expected to grow by 7% in 2021. This equates to the US rate of 7%, while the rest is overtaken by the G7.

But the UK economy suffered a bigger contraction last year than any other G7 country at 9.8%, meaning growth projections for this year are being made from a lower base. In other words, Britain has a bigger hill to climb than other countries.

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The reality is that the UK is taking longer to recover from the pandemic than many other large economies. According to Capital Economics, UK GDP will not return to its pre-Covid-19 levels until the first quarter of next year. This is three months after the eurozone, which includes G7 countries Germany, France and Italy. The US economy recovered its previous shape in July.

Worse yet, the pace of recovery in the UK seems to be slowing down. Capital Economics expects the British economy to stabilize in September and October, and potentially even contract as the fuel crisis and other shortages hurt activity.

“And if all this is not enough, the threat of an imminent increase in interest rates is looming over the economy, unlike the United States or the eurozone,” said Ruth Gregory, a senior UK economist at Capital Economics. If the Bank of England considers inflation to be high enough to be ignored, a rate hike could happen in November.

“The outlook for the UK economy is clouded. The combination of the risk of widespread shortages, a fuel crisis, low fiscal support and high interest rates will make it difficult for the UK economy to perform as well as its European peers. ” Gregory said.

Rising wages and investment

Johnson insisted during his BBC interview that the United Kingdom was seeing an increase in wages after “flatlining” for more than 10 years.

“What you’re seeing is people with lower incomes being paid more,” he said. “Wages are rising faster for people with lower pay than those with higher incomes.”

Wages are increasing. But the data is very difficult to analyze because there was turmoil in the labor market in 2020, when earnings were hit by the pandemic and wage growth turned negative. According to the Office for National Statistics, salary data “should be interpreted with care”.

Paul Johnson, director of the Institute for Fiscal Studies, said on Monday that there was little evidence of the change in poor wage growth associated with low productivity that affected the previous decade.

“While underlying wages are probably rising around 4% at the moment, don’t forget that inflation is well above 3%. So we are not seeing significant wage growth at the moment and we just want to see if that correlates with that.” High skill, high investment and high productivity,” he told BBC radio on Monday.

Tony Danker, director general of the Confederation of British Industry (CBI), said on Tuesday that from the government’s wish list of higher wages, skills, investment and productivity, “the challenge we have is that only the former emerge. That’s why people are worried about inflation.”

Higher wages will increase the cost of the business without increasing productivity. Those increases will likely be passed on to consumers in the form of higher prices.

“I hope we’ll hear more from the finance minister in a few weeks’ time in the budget on how to have higher skills, higher investments, higher productivity that make higher wages a good thing, not something that economists cause.” And the finance minister has some concern,” he told BBC radio.

big picture

Johnson has so far been reluctant to forcefully address labor shortages, insisting they are part of the “stress and strain” of a country transitioning toward a highly productive economy. He said pulling the big lever marked “uncontrolled immigration” is not the answer.

But the government needs a plan to address the huge economic setbacks arising from the pandemic and Brexit.

Some economists have compared current economic conditions to the 1970s, when fuel shortages, rising prices and slow growth contributed to an extended malaise. But Neil Shearing, group chief economist at Capital Economics, argues that the post-World War II period is a better one.

In that case, a large number of workers flooded the jobs market, but they did not have the right skills, resulting in a shortage of workers. The price of energy skyrocketed, and the lack of supply fueled inflation.

Shearing said, “All of this reflects the situation facing the UK and other advanced economies today – and appears ominous for those who worry that we now face a return to high rates of inflation.” “


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