A think tank warned that the UK economy suffers from a “British Disease” of 1970s style, which means inflation won’t fall to Bank of England target of 2 percent until 2027.
The National Institute of Economic and Social Research said that the economy has suffered five years of a “lost growth”. Inflation is expected to remain high and government deficits will be semi-permanent for the foreseeable future.
Jagjit Chadha is the director of Britain’s oldest independent think tank for economics. He said that the nation’s problems had led to a “re-emergence” of the British Disease, referring to the stagflationary era of the 1970s when the term was first coined.
He said that the UK would be an outlier in the developed world, as the growth will not go beyond its pre-Covid peak. According to the institute’s most recent quarterly forecast, the UK economy will only reach its prepandemic size by the end of next year. This marks a five-year stretch of lost economic development and the longest period since the global financial crises.
According to the Institute, headline consumer price inflation will not reach the Bank’s target of 2 percent in the next four-year period, with an inflation rate of averaging 2.2% in 2027. This is much worse than Bank estimates which predict that inflation will fall to 2% at the beginning of 2025.
According to the Institute, headline inflation will drop to 5.2% by the end of the year, from at 7.9%. This is just a little short of Rishi Sunak’s goal of halving the rate over 2023. NIESR predicts that inflation will end next year at 3.9%.
The projection of persistent inflation is based upon wage growth that will remain above 6 percent this year and the next and on food price inflation which reached a 30 year high in March and has been declining from a 17 percent peak. The UK labour market will remain resilient despite rising interest rates. In 2025, unemployment is projected to peak at 5.1%, up from the current rate of 4.1%.
Chadha warned the country that, despite the record number of workers, it was still on track to continue posting budget deficits in the future. He said that the UK consistently runs a fiscal surplus, which constrains fiscal policy. “We must ask any new government how they will generate growth in the absence of fiscal space.”
Stephen Millard, deputy-director at the Institute, said that there is no place for pre-election taxes, as they would “create an economy boom which would end very badly”.
The UK remains on track to avoid a severe recession. Growth is expected to grow by 0.4% this year, and by 0.34% in 2024. Leaza McSorley is a senior research manager with NIESR. She said that this projection could be affected by a Bank raising interest rates too much. The institute predicts that the base rate will peak at 5.5% from its current level of 5.25 percent.