The assessment delivered by the Bank of England this week made for dismal reading.
The UK is now in recession, and a shrinking labor force means the economy has little scope to make up ground once the slump is over.
As the Resolution Foundation think-tank pointed out, Britain is in the midst of the worst 20 years for growth since the Great Depression, assuming the BOE forecasts are correct.
The central bank now thinks UK output can grow no more than 0.7% a year without adding to the inflation pressures bedevelling the economy — a quarter of the pace in the decade prior to the 2008 financial crisis. Productivity growth has been anemic since the crash, and the BOE sees little improvement in the medium-term.
But the main development weighing on potential supply is the loss of hundreds of thousands of people from the labor force since the coronavirus pandemic, particularly older workers. Many cite long-term sickness for dropping out, and, according to the BOE, they are probably not coming back.
By historical standards, the recession forecast by the BOE is shallow. From peak-to-trough, output falls by less than 1% over five quarters in the BOE’s outlook. The recessions of 1980 and 2008 lasted no longer, but each cost the economy around 5% of GDP on average.
Rather than a rebound in 2024, however, the BOE predicts stagnation with the economy still smaller in early 2026 than it was before the Covid-19 pandemic and an extra 500,000 people unemployed.
That’s bad news for Prime Minister Rishi Sunak, whose Conservative Party is far behind the Labour opposition in opinion polls. Fixing the structural issues hampering the economy will take time, not the two years the government has before it must hold a general election.
Earlier in the week, the International Monetary Fund warned that Britain faces the bleakest two years of any major industrial nation — including Russia under widespread sanctions.
The BOE has always thought that Britain would pay an economic price for leaving the European Union. It still does, and fears that the damage is happening much sooner than feared.
Business investment is expected to keep falling, and new analysis by BOE staff suggests trade with the EU has been weaker than official figures suggest.
Since trade barriers were imposed in January 2021, official data shows a 7% fall in trade. But the BOE reckons the decline is closer to 14% once adjustments are made for data issues, such as delayed customs declarations.
“We have not changed our estimate of the long-run effects, but we have brought some of them forward,” BOE Deputy Governor Ben Broadbent said at a press briefing this week. “We think probably they are coming in faster than we first expected.”
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