By Michael Race
Business reporter, BBC News
The spending power of workers in some parts of the UK will still be below the level it was before the pandemic by the end of 2024, a think tank has warned.
Pay, after accounting for rising prices, is set to fall between 2019 and 2024 in regions like the West Midlands and East of England, said Niesr.
By contrast, it said London and parts of the South were “steaming ahead”.
The Treasury said the UK economy had “proven resilient… heading off predictions of a recession this year”.
Over the last few years inflation – the rate at which prices rise – has soared, driving up the cost of living for millions.
Wages have also climbed, but not as fast as prices, leaving households across the UK feeling squeezed.
The National Institute for Economic and Social Research (Niesr), which is one of the UK’s oldest economic forecasting bodies, said that Brexit, Covid and the Ukraine war had badly affected the economy, resulting in five years of “lost” growth.
It added that the surging cost of living meant people’s spending power in some parts of the UK would still not be back to 2019 levels by late next year.
The regions set to see the biggest squeeze are the East of England, parts of the South East and the West Midlands, where pay, when inflation is accounted for, is forecast to fall by between 0.5% and 5% in the period.
By contrast, people’s “real wages” in London are forecast to jump by 7%, while in Wales they will rise by 4.6% and in Northern Ireland by 4%. However, the think tank said there were disparities within these regions.
Prof Stephen Millard, deputy director for macroeconomic modelling and forecasting at Niesr, told the BBC’s Today programme that London was “steaming ahead” but added the capital was “lucky”.
“It’s full of industries that are traded, highly competitive, where productivity growth has been high, whereas other areas of country have been much more affected by Brexit,” he added.
“The industries there are either struggling to import and export or they are non-traded industries in the first place so they don’t tend to grow as fast.”
Niesr said the UK’s “stuttering” economic growth had widened the gap between the wealthier and poorer parts of the country.
It forecast the amount of money made by the UK economy – its gross domestic product (GDP) – is not forecast to return to 2019 levels until the second half of next year.
It predicted that inflation, the rate at which prices rise, will remain continually above the Bank of England’s 2% target until early 2025, meaning the cost of living will also continue to rise. Inflation is currently 7.9% annually.
The Bank, which is tasked with keeping inflation under control, said last week it expected to meet its own target of 2% by early 2025.
In its efforts to bring down inflation, it has put up interest rates 14 times in a row. It hopes that by increasing borrowing costs, people will spend less money, prices for goods will not rise as fast and the inflation rate will come down.
However, higher rates are also driving up the cost of loans and mortgages, putting further pressure on households.
Last week, the Bank signalled it would keep interest rates higher for longer to get inflation under control. But some economists warn raising rates too aggressively could push the UK into recession, which is defined typically as when the economy shrinks for two three-month periods – or quarters – in a row.
Recession risk
Niesr said it expected the UK to avoid going into a recession this year, but said there was a “60% risk” of one by the end of 2024.
The Bank of England, by contrast, does not expect the UK to enter a recession, but has forecast that growth will be limited and unemployment will rise over the next few years.
Prof Millard said the answer to the UK’s economic woes was “public investment”.
“The government needs to think beyond next few years by investing in public infrastructure, education, healthcare, in the green transition. The result will eventually be higher growth, but it takes a while, at least a couple of parliaments,” he added.
In response to the report, the Treasury said the UK economy had “proven resilient in the face of global challenges, heading off predictions of a recession this year unlike some of our neighbours in Europe”.
It said the Bank of England’s forecast for falling inflation would “create the right conditions for growth”.
“That’s alongside record investment in infrastructure and major reforms to bring more than 100,000 people into the workforce while driving further business investment,” it added.
