A recession is already with us and could last all next year and beyond, says the Bank of England. It’s a gloomy outlook, tempered only by the Bank’s monetary policy committee signalling that the downturn is unlikely to be as bad as expected, despite its jolt to mortgage payers last week with a 0.75 percentage-point increase in the base rate.
Interest rates will peak at a lower level than the 5.25% financial markets previously expected – somewhere between 3% and 4% – which means the recession, rather than being the longest in 100 years, will be short and shallow.
In a way it is embarrassing that the UK economy can be pushed into a recession by low interest rates. But that’s what happens when your growth engine generates the same horsepower – and boasts the same reliability – as an Austin Allegro.
The Bank’s weak outlook chimes with most industry surveys, which show the UK not so much shrinking, at least not in a way seen in previous recessions, as stagnating.
The jobs market symbolises the malaise, appearing to be both in rude health and in desperately bad shape. Most people who want a job, and can do a job, have a job. It may not be the best job or one they always wanted, but they have one.
Conservative MPs, under pressure to explain why 12 years of Tory policies have done nothing improve the economic outlook, regularly parrot the unemployment rate, which is at its lowest level since the 1970s.
To counter the misleading message from this simple statistic, a report out later this week will show how unemployment is artificially depressed by the huge number of people no longer looking for work, because they are either ill or so fed up they have taken early retirement.
The report is the launchpad for a new commission on the future of employment support, which will bring together “experts from business, public services and civil society to develop a blueprint for reform”.
Like many commissions, it could write its conclusions within a few weeks given how much we know about the failings of government and the measures needed to improve the situation. But it has to show it has considered all options, so it may be a few months before its findings see the light of day.
Interestingly, the initial report shows how the UK has had “among the worst employment recoveries in the world, fuelled by a shrinking workforce and lack of access to effective employment support”.
Sponsored by the Institute for Employment Studies (IES) and the charitable arm of fund manager abrdn, the report says a finding from earlier this year still holds – that the UK is almost unique internationally for the number employed being below pre-pandemic levels. The recovery is the third worst in the developed world, behind Latvia and Switzerland.
While our government flails around in search of an answer, the report says Latvia and Switzerland are fast improving. “By early next year the UK is likely to be the only country in the developed world with lower employment than in 2019,” it says.
The findings are far more extensive and detailed than can be discussed here, but with the Bank of England saying the main reason it had to increase interest rates was because of the lack of workers, they are important to the debate about the economy.
Last week it became clear that interest rates have not been raised to tackle inflation generated by the high price of energy on global markets. The main reason is to create a recession that will put 500,000 people in the dole queue and thus undermine those who demand higher wages.
A wage rise to compensate for higher inflation is the “second round effect” that central bankers say must be stopped, otherwise businesses will have to put up their prices, creating more inflation. Only an increase in unemployment can sap people’s appetite for a confrontation over pay.
Except, as Tony Wilson, head of the IES, has spent much of the past year trying to persuade ministers, they could increase the supply of labour by enticing back the 500,000 or more people who are no longer looking for work.
Endless Tory infighting means no change has been made to the way Britain treats those who want to work but find they cannot, either they need a gentle reintroduction after having Covid or because the are over 50 and, like many millennials, have reconsidered handing over their time and mental wellbeing to a slave-driving employer. Brexit, of course, has made this bad situation worse.
The Sunak/Hunt budget won’t provide an answer. Like the Bank of England, it will follow the miserable path we are all on – towards stagnation.