I attended the London and East Economic Summit, organised by the ICAEW on June 21st. Please read on for a summary of the current economic outlook and what the Bank of England and Government can do to improve it.
Krishnan Guru-Murthy, the award winning news anchor, was the chair at the London summit and keynote speakers included:
Huw Pill, Chief Economist and Executive Director for Monetary Analysis at the Bank of England.
Anna Leach, Deputy Chief Economist at CBI
Iain Wright, Managing Director, Reputation & Influence at ICAEW
Economic Challenges
Inflation
There are two key drivers of the high inflation we are currently experiencing. Firstly, there has been an increase in the prices of imported goods due to weaker supply chains. The Covid era has changed the overall pattern of demand where goods are now favoured over services. Secondly, there has been an increase in global energy prices, particularly oil and wholesale gas. Both impacts have been exacerbated by the war in Ukraine.
The UK is a net importer of goods and energy.
Labour Market
There are currently high levels of vacancies in what is a tight labour market. This has been driven by a reduction in the supply of labour (and not an increase in demand). Two factors explain this. The loss of EU workers associated with Brexit and the impact of Covid (which has encouraged some employees to retire early or work less hours, for example), have made it more difficult for employers to recruit.
This impact is already putting pressure on employers to increase wages in order to retain and attract staff. Significant and persistent pay increases can create the danger of an inflationary spiral which could endure.
Policy Outlook
The Bank of England is focused on returning the UK economy to its inflationary target levels in 2-3 years. Monetary policy decisions made today (such as increasing interest rates) can take 12-18 months to take effect.
To this end, we can expect further tightening of monetary policy over the next few months.
The BoE is mindful it will need to maintain a delicate balance. If monetary policy is too forceful (ie interest rates go too high, too quickly) this will increase the risk of an economic recession. On the other hand, if monetary policy is too weak, a self sustaining inflationary spiral could be created and continue into the medium term.
Business Confidence
Business confidence, as measured by the Business Confidence Monitor report (one of the largest and most comprehensive quarterly reviews of UK business confidence, providing a regular snapshot of the economy informed by senior business professionals running all types of businesses across the UK), is looking gloomy.
However, despite the fact that the level of business confidence has fallen for the 4th quarter in a row, confidence is still recorded at positive levels compared with historic data.
Government Action
It is vitally important that the government supports business during this challenging period. The government can boost business investment by improving access to finance. Incentives should also be created to encourage businesses to invest in training and development. Support should be provided in the transition to Net Zero and encouraging inclusivity. Finally, the government can help businesses digitise.
All of these actions can help to increase productivity.
There are opportunities for the UK economy if we focus on purposeful growth . Our economy will benefit from balanced economic growth with higher investment relative to consumption.