Economic backdrop to the Chamber Q3 survey
Date published:
The third quarter Economic Survey was undertaken against a challenging background of economic concerns.
In August, annual consumer price inflation was 9.9%. This is a slight decrease from the previous month but a steep rise since March 2021, when annual inflation was 0.7%.
Much of this increase has been driven by energy and food price rises but increasing wage inflation has also played a role. In July, annual private sector wage inflation was 6%.
This is still below price inflation, meaning workers experienced a fall in real terms. UK GDP growth has also been significantly declining quarter-on-quarter since the end of 2021, and recession is expected in Britain very soon.
This is despite the expected significant bounce back in demand following the crash in GDP during the worst of the pandemic. UK GDP in Q2 2022 was still 0.2% below comparative, pre-pandemic figures from Q4 2019.
This can be compared to the US, Eurozone, Canada, Italy, France, Japan, and Germany, none of whom recorded negative GDP post-pandemic. At the end of September, the OECD forecasted 0% GDP growth for the UK in 2023, lower than any other country except Germany, which is? particularly susceptible to the energy crisis.
The IMF categorised the UK at the bottom of this league table. In contrast, UK unemployment decreased 0.2% between May and July to 3.6%, the lowest rate since 1974. UK economic inactivity, reflecting those people leaving the labour market and not seeking employment, did however rise by 0.4%. Comparatively, the North East recorded 4.7% unemployment and an increase in economic inactivity of 0.5%, which took the proportion of working age people in the region unable to work to 25.3%.
The rate of economic inactivity in the North East is the highest in England, and the rate of unemployment is the highest in the UK.
It is not surprising that the North East Quarterly Economic Survey placed inflation, energy prices and staff costs at the top of business concerns for Q3.
On 23rd September the new Chancellor of the Exchequer delivered his growth plan.
The essential elements of the plan were proposals to cap energy costs and drive higher growth through expanding the supply side of the economy. To help businesses with energy costs, a new but short-term six-month Energy Relief Scheme was announced.
This began from the first of October and will be reviewed after three months.
Despite prioritising supply-side reform, main policy attempts to drive growth in the ‘mini’ budget were more aligned with boosting demand.
Proposed policies included cuts to National Insurance contributions, a reduction of Stamp Duty on house purchases, bringing forward the cut in basic income tax to April 2023, and abolishing the 45% higher income tax rate.
Supply-side changes did include new Investment Zones, a freeze to the 19% Corporation Tax rate and recommended future tax simplifications.
Investment Zones provide time-limited tax relief and planning liberalisation, primarily for Local Enterprise Partnership’s, Mayoral Combined Authorities and unitary authorities who can put forward competitive bids.
The markets were not convinced of comments in the Chancellor’s speech about the Government keeping spending under control through adhering to fiscal sustainability and reducing debt as a proportion of GDP. Despite large increases in public debt, Kwasi Kwarteng did not provide any detailed, independent financial forecasts from the OBR for his fiscal package.
Following the statement, therefore, borrowing costs rose significantly as sterling fell against the dollar and long-term Government bond rates rose.
The Bank of England had to substantially intervene to stabilise the markets. This ‘judgement’ by financial markets reflected a lack of confidence in the growth plan, and further turmoil has damaged the Government’s economic credibility.
This credibility was further damaged by policy U-turns, most notably in scrapping the proposal to abolish the top rate of income tax.
As of early October, expectations are that there will be negative growth, rather than zero or the 0.1% growth forecast by some in August.
The Financial Times reported on the third of October that “many economists see no improvement in the medium-term outlook, with predicted growth at 1.5%, well below the chancellor’s target of 2.5%”.
The Bank of England is now expected to maintain pressure on higher borrowing costs through increases in the base rate.
This will offset any expansion in domestic demand planned in the ‘mini’ budget.
With business energy bills also rising significantly, even with Government help, and consensus suggesting household spending will be less in the next 12-18 months, businesses face a very challenging environment.
Little in the way of fundamental changes to productivity growth were provided. Arguably the main emphasis should be through underlying supply-side change, not short-term demand-led growth.
Until OBR forecasts are available in a few weeks’ time, instability and uncertainty will likely be an ongoing feature in the UK.
This high-risk environment will have a significant impact on business planning. Whether the Government’s belief that higher spending by the wealthier will ‘trickle-down’ to benefit everyone leading to ‘levelling-up’ and the supply-side rebalancing of the UK spatial economy, is therefore yet to be seen.
Prof. Richard Harris, Economics Department, Durham University