By Michael Race
Business reporter, BBC News
The spending power of workers in many parts of UK will remain below the level it was before the pandemic until the end of 2024, a think tank has warned.
The National Institute for Economic and Social Research said a triple blow of Brexit, Covid and Russia’s invasion of Ukraine had badly affected the economy.
It projected the UK was set for five years of “lost economic growth”, with the poorest hit hardest.
The Treasury said it had helped bring 100,000 people back into the workforce.
Over the last few years inflation – the rate at which prices rise – has soared, forcing up the cost of living for millions.
Wages have also climbed, but not as fast as prices, leaving households across the UK feeling squeezed.
Niesr, one of the UK’s oldest economic forecasting bodies, said that as a result, pay when inflation is taken into account would only return to 2019 levels by late next year in regions such as the North East, Yorkshire, the West Midlands, Wales and Northern Ireland.
By contrast people’s “real wages” in London, southern parts of England, the North West and Scotland were likely to recover more quickly.
For example in London, real wages are expected to be 7% higher by the end of next year than they were in 2019 – whereas in the West Midlands they are forecast to be 5% lower.
Prof Stephen Millard, deputy director for macroeconomic modelling and forecasting at Niesr, told the BBC’s Today programme 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.
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.
