Supply issues, Brexit and wage pressures set to stagnate UK economy

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Supply chain disruptions and a slump in consumer confidence are set to see the UK economy stagnate in the medium-term, a major economic think tank said on Tuesday.
The National Institute of Economic and Social Research (NIESR) said in its quarterly update that it expected UK GDP growth to come in at 6.9% in 2021 and 4.7% in 2022 as the economy rebounded from the Covid-19 pandemic, but to then fall to just 1.7% in 2023 and 1.3% in 2024.

It said persistent supply-chain issues, alongside reduced immigration from the European Union and businesses being more cautious with capital expenditure in the wake of Brexit would put a lid on economic growth.

Inflation was also set to be an issue, with the institute reckoning prices will rise 5% next year, and stay in growth mode for longer than the Bank of England was predicting.

In the short-term, NIESR said a combination of rising prices, lagging wages and the end of the pandemic-related uplift in Universal Credit would lead to stuttering growth, rising inflation and widening income inequalities in the coming months.

Household incomes would be “painfully squeezed” by a combination of earnings growth lagging inflation, rising interest rates and tighter fiscal policy, it said, despite the “modest uplift” in the national minimum wage.

The effects would be felt unevenly, NIESR warned, with Universal Credit recipients the hardest hit, and those in receipt of significant non-labour income – which would not be subject to the new Health and Social Care Levy – relatively unaffected.

“A squeeze on real incomes for workers and those on Universal Credit will slow economic growth next year, with the adverse effects on consumption offset by lower savings,” said NIESR’s interim deputy director for macroeconomics, Paul Mortimer-Lee.

“Meanwhile, inflation is set to peak around 5%, forcing a reluctant Bank of England to raise interest rates, albeit grudgingly.

“Unemployment should settle in a narrow range around 4.25% – the risks are skewed to the upside on inflation and the downside on growth.”

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