Rishi Sunak will fight the next election against a backdrop of an economy suffering from five years of lost growth and a widening of the gap between the prosperous and less well off parts of Britain, a leading thinktank said on Wednesday.
The National Institute of Economic and Social Research (NIESR) said it would take until the third quarter of 2024 for UK output to return to its pre-pandemic peak and that there was a 60% risk of the government going to the polls during a recession.
In its quarterly update on the state of the economy, the NIESR said the poorest tenth of the population had been especially hard hit by Britain’s cost of living crisis and would need an income boost of £4,000 a year to have the same living standards they enjoyed in the year before Covid-19 arrived.
The poorest households – hit by weak wage growth, higher debt, the need to devote more of their budgets to expensive energy, food and housing costs; and with few if any savings – would be 17% worse off by the end of 2024 than they were five years earlier. The richest households would be 5% worse off.
The director of the NIESR, Jagjit Chadha, said there were signs of a return to the “British disease” of the 1970s, a period when the UK struggled with a combination of high inflation and weak growth.
“Until we ignite economic growth, a substantial portion of households will struggle with high housing and food costs, poor transportation, a creaking healthcare service and dwindling savings. It is not a promising inheritance for the next government,” he said.
A general election must be held by January 2025 at the latest.
The thinktank believes the UK will avoid recession this year, but that the economy will only grow by 0.4%. The impact of the Bank of England’s 14 consecutive increases in interest rates, to 5.25%, will result in even more modest growth of 0.3% in 2024.
The NIESR said there was an even chance the economy would contract by the end of 2023 and roughly a 60% risk of a recession by the end of 2024.
The NIESR’s deputy director for macroeconomic modelling and forecasting, Prof Stephen Millard, said: “The triple supply shocks of Brexit, Covid and the Russian invasion of Ukraine, together with the monetary tightening that has been necessary to bring inflation down, have badly affected the UK economy.
“As a result, we expect stuttering growth over the next two years and GDP [gross domestic product] to only recover to its 2019 quarter four level in 2024 quarter three. The need to address the UK’s poor growth performance remains the key challenge facing policymakers as we approach the next election.”
Despite the government’s focus on levelling up, the NIESR found wage growth had been fastest in London. It predicted real wage growth of 7% in the capital between the end of 2019 and 2024, compared with a fall of 5% in the West Midlands.
The thinktank’s deputy director for public policy, Prof Adrian Pabst, said: “We are not levelling up. We are doing quite the opposite in terms of real wage growth.
“The aggregate shocks to the UK economy have widened disparities of income and wealth across the household distribution and between prosperous and poor parts of the country.
“Falling real wages, combined with persistent inflation, are hitting the low-income households hardest, leading to lower real disposable incomes by about 17% in 2024 compared with 2019.
“The increasing inequalities facing poorer families are reflected in slower wage growth and fast-rising unsecured debt. For some of the poorest in society, coping with low or no real wage growth and persistent inflation has involved new debt to pay for permanently higher housing, energy and food cost.”
The NIESR said 1.6 million low-income households with incomes of £15,000 or less were spending an average of £3,200 a year paying back debts at interest rates averaging 76%.
This article was written by Larry Elliott Economics editor from The Guardian and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.