The UK economy is taking off strongly after the acute covid crisis . However, this rapid recovery in activity can generate major problems in the short and medium term. The islands’ greater isolation after Brexit and global supply problems threaten to bring back the economy from the shortages seen in the 70s, and incidentally wake up the beast of inflation (as the chief economist has warned Bank of England), causing significant damage to the British economy.
Andy Haldane, chief economist at the Bank of England, said in an article a few weeks ago that the beast of inflation has never been dead and that the United Kingdom risked suffering a spiral of prices and wages that could be reminiscent of those experienced during the decades of 1970 and 1980.
CEBR: 100,000 truckers needed for all products to continue to reach UK outlets
“In my opinion, this is the most dangerous time for monetary policy since inflation targeting was first introduced in the UK in 1992 after the debacle of the European Exchange Rate Mechanism,” Haldane said.
The recovery of the economy is solid , while interest rates remain at historical lows and fiscal policy maintains a very expansionary tone. This recipe is very similar in all developed countries (absolute fiscal and monetary coordination), which is generating bottlenecks , a strong boom in raw material prices and a certain shortage of components.
In addition, in the United Kingdom the unemployment rate is 4.7% and wage pressures are appearing , while the problems of companies to find the workers they need are multiplying.
The warning voices grow. Haldane is not alone. The warnings come from several sides (also from the other side of the Atlantic) despite the fact that inflation, for now, has only slightly exceeded the 2% that the Bank of England is targeting.
Douglas McWilliams, vice president of the Center for Economics and Business Research (CEBR), says in a recently published note that “today there are eerie echoes of what happened in the 1970s. These weeks, images of empty shelves in supermarkets and supermarkets abound. shops , sometimes attributed only to Brexit.
But at the same time there is a global shortage of electronic chips , there is also a shortage of potato chips in the US, for example. In labor matters and going back to the UK there is a shortage of drivers of all kinds, but especially heavy vehicles, where Brexit is clearly part of the problem. ” Scarcity is everywhere.
This expert sees with fear how the production of automobiles is being reduced due to the lack of semiconductor chips, while the waiting times for the delivery of a new vehicle are increasing in half the world and the price of second-hand cars is skyrocketing. make up for the shortage of first-hand ones. In turn, there are certain tensions in the real estate market, where demand is widely exceeding supply, which is generating a sharp rise in house prices when the economic recovery has just begun.
On the other hand, McWilliams assures that in addition “a great shortage of food is emerging around the world . Shipping prices have skyrocketed; the pre-pandemic cost to send a container from China to Ireland was 1,250 euros. Now it is of 8,000 euros “. This expert assures that in the United Kingdom, the problems, if they are not totally attributable to Brexit, have almost certainly been exacerbated by it.
The covid and Brexit cocktail
The combination of covid-19 and Brexit is a major factor contributing to the truck driver shortage , for example. Before Brexit, the CEBR estimated a shortage of about 60,000 drivers, while the latest estimate is more than 100,000. Part of the food shortage in the UK is also due to Brexit or subsequent customs regulations.
And, although the exodus of foreign workers is due, at least in part, to the covid pandemic, it can also be attributed in a considerable part to Brexit and new regulations on migration that have much more bureaucracy, explains the expert.
There is a shortage of certain goods and there is also a lack of workers. “Most will not remember the shortages of the early 1970s and specifically 1973 and 1974. My parents were furnishing a newly built house in late 1973 and I remember as if it were yesterday how they had to order Malaysian furniture and then later. sent to the UK so they could have furniture for Christmas.
During 1973 it was difficult to find many typical products that are usually on the shelves of the stores, while the delays could last from a few weeks to several years. ”
This expert explains that the shortage ended with the oil crisis of the 70s . Supply could not keep up with demand, so it was a serious recession that managed to rebalance forces in the face of the decline in consumption. But until the fatal recession hit, things weren’t much better. In the UK, where union power was at its peak, annual inflation peaked at 26.9% in June 1975.
Inflation in the US peaked in the mid-1970s at 12.3%, but actually surpassed that peak in 1980 after the second oil price shock, reaching 14.8% in March 1980. Even countries that were deemed to have handled inflationary pressure “well” like Switzerland and Germany had annual inflation of 9.8% and 7.0% at their peaks in the mid-1970s.
Risk to the economy
Today, most experts predict that the impact of the shortage in the UK and the rest of the world will increase during the rest of 2021 and, in particular, slow economic growth in 2022. CEBR calculations reveal that a percentage point of global growth.
“But this is a small beer compared to the impact it could have if inflation ends up reaching double digits in the style of the 1970s. Empirical work suggests that if inflation is 10%, the cost of bringing it down again at 2% it is at least 4% of GDP. ” These are the costs of high inflation to the economy.
To avoid this scenario, McWilliams and CEBR send a message to politicians and central bankers: “Ultimately, the only answer against inflation caused by shortages is to reverse expansionary fiscal and monetary policies. However, governments can do something about it. further to accelerate the rate at which the economy returns to moderate inflation, in particular, they can boost competition and can deregulate.
They also need to be very careful about policies that could drive up prices, such as higher indirect taxes and policies that fight climate change. Timing of constraints to meet climate change goals may need to be carefully aligned with macroeconomic goals to avoid a suboptimal outcome.