The author is the author of Two Hundred Years of Blurring Across: The Surprising Story of the British Economy.
It has become easy to use the dreaded phrase ’70s’ when discussing the British economy. Inflation has remained consistently high, industrial unrest continues to dominate the news agenda and all against the backdrop of soaring energy prices and a government that seems to stumble from one crisis to the next. The presence of advertisements for the ABBA concert, in admittedly anthropomorphic form, across the tube network adds to the sense that the UK has gone five decades back in a time that has become a paragon of economic failure.
Although the comparison is superficially attractive, it is often exaggerated. Britain certainly has an inflation problem. Core inflation was still above 10 per cent in the UK in March compared with 7.8 per cent in Germany or 6.6 per cent in France. For two months in a row, the benchmark price has stubbornly refused to fall as far as analysts expected. Even more worrisome is that core inflation, excluding volatile components such as food and energy prices, remains above 6 percent as does service inflation, which is often seen as the best measure of domestically driven price pressure. All of this would be enough to ensure that the Bank of England feels the need to continue tightening monetary policy.
But the story has shifted from one of ever-rising inflation to one of failure to come down as quickly as expected. This is far from a comfortable place to be, but it is at least showing some signs of progress. Few doubt that headline inflation should fall sharply in the coming months as the impact of the 2021-22 energy price hikes begin to fade from the numbers.
What will happen with core inflation is less clear. There has been much talk of a 1970s-style wage-price spiral. The fear was that workers would overbid their paychecks in an attempt to protect their incomes, but in doing so they would force companies to engage in another round of price increases. Annual wage growth picked up as lockdowns eased in 2021 and businesses that reopened struggled to fill vacancies. But in recent months, as growth has slowed and the number of job vacancies has decreased, wage growth has slowed. The result was pressure on wages strong enough to add to business costs and core inflation, but nowhere near strong enough to protect the real incomes of hard-pressed households.
The problem with the easy 70s story is that the job market of the 2000s is not the job market of that decade. Trade unions are weaker by an order of magnitude – around one in five British workers are members today compared to more than half at their peak. Legislation of the 1980s and 1990s created a more liberal job market. The bargaining power of labor is structurally lower than it used to be.
The sad truth is that there is no simple answer to the question ‘what is wrong with the British economy?’ Instead, there are several interconnected crises occurring at the same time. The sharp rise in global energy prices and all the disruptions caused by the pandemic are of course immediate factors, and the UK has been particularly hard hit by both. In the wake of Covid-19, NHS waiting lists for routine appointments and operations have risen to around 7 million – up 75 per cent on 2019.
This has become a macroeconomic problem, with 6 percent of people of working age reporting being too ill to work. Strikes across transport and the public sector, in response to lower real wages, have assumed macroeconomic significance, with the number of lost annual working days at the highest levels since the 1990s.
Then there is Brexit. After the 2016 referendum, many companies either canceled or delayed capital spending plans while they waited for clarity on what Britain’s new trading arrangements would look like. This uncertainty led to a lack of commercial investment. The new trade arrangements themselves represent frictions in previously frictionless trade frontiers, dampening productivity and long-term economic growth and now adding to margin price pressures.
But the problems predate 2016, too. Productivity growth, the ultimate driver of both economic growth and living standards, has been abysmal since 2008. It is this underlying crisis that has left expected real household incomes no higher in the mid-2020s than they were a decade and a half ago.
On one important level, the ’70s analogy contains important facts. Then, as now, government was forced to deal with simultaneous crises that called for different, often incompatible, policy responses. British governments in that decade were overwhelmed not only by soaring oil prices and a downward spiral in wage prices, but also by half a dozen other problems, from the Bretton Woods crash to the housing market boom and bust.
The incumbent government now risks being equally overwhelmed by managing the ongoing economic fallout of the pandemic at the same time as the energy price crisis, along with Brexit, against the backdrop of 15 years of anemic growth and with the challenge of a net transition to zero. The real feeling for policymakers in the 1970s was one of fighting fires almost continuously.
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