UK Real Incomes Need to Fall 5% Due to Shocks, Says Economist Charles Bean

Reed Landberg, Bloomberg News

An elderly woman pushes a shopping trolley in the city centre of Liverpool, UK, on Tuesday, Sept. 27, 2022. The UK's stock and bond markets have lost at least $500 billion in combined value since Liz Truss took over as Prime Minister, with investor confidence shattered by a shock tax-cutting budget. , Bloomberg

(Bloomberg) -- Charles Bean, one of the UK’s most prominent economists, said the country as a whole will have to take a real-terms pay cut to adjust for the shocks stemming from the war in Ukraine.

A former Bank of England deputy governor and member of the Office for Budget Responsibility, Bean said businesses can absorb some of the hit but that people too will suffer.

“The real problem here is that our economy has been subjected to severe external shock, and then the question is how that is shared out,” Bean said in an interview on BBC Radio 4’s “Today” program on Thursday. “Broadly speaking, real incomes have to fall by about 5%, and then that can be shared out in different ways.”

He said BOE officials, who will decide Thursday on whether to continue their quickest cycle of interest rate increases in three decades, will be trying to gauge that balance. He indicated there’s some arguments for higher rates and also to pause the tightening.

“The backward-looking data points probably needs a bit more,” Bean said. “On the other hand, the committee has already pushed through substantial rate increases over the past year, and the effect of those is still working through. It would be reasonable to take the view that there will be some slowing in the economy working through.”

He said that granting bigger pay raises to public-sector workers probably wouldn’t add too much pressure to inflation.

“At the current juncture, given that private-sector pay running well ahead and public-sector pay, the sorts of top ups as being contemplated, I don’t see the private sector is leading this in any way,” Bean said.