U.K. Living Standards to Suffer in 2022, Niesr Warns

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Britain’s consumers will feel their finances squeezed in the coming years as inflation, interest rates and taxes all increase and welfare payments decline.

The National Institute of Economic and Social Research warned that economic growth will slow in each of the coming years, from 6.9% in 2021 to 4.7% in 2022 and 1.7% in 2023. It anticipates inflation reaching 5% by June.

“Household incomes will be painfully squeezed by a combination of earnings growth lagging inflation, rising interest rates and tighter fiscal policy,” the research group said. “The next few months are likely to bring stuttering growth, rising inflation and widening income inequalities to the U.K. economy.”

Niesr expects the Bank of England to respond by raising interest rates from a record low of 0.1% to 0.25% in December and then 0.5% in June. At that point, the central bank will hold off on further increases and tighten policy by allowing bonds to slip off its balance sheet when they mature.

The outlook illustrates the strains facing the British economy even after the nation adapts to exiting the European Union and the slowly passing coronavirus pandemic. It suggests household finances will be pinched, reducing the power of one of the main engines of growth in previous decades.

It also indicates Prime Minister Boris Johnson’s government is a long way from achieving its ambitions of “leveling up” less prosperous regions of the country or boosting wages and productivity enough to generate another spurt of growth.

“Britain’s broken economic model shows no signs of turning into a high-wage, high-productivity, high-growth economy anytime soon,” said Adrian Pabst, Niesr’s deputy director for public policy. “England’s regions and the three devolved nations are not catching up with London and the metropolitan South-East. Instead, regional disparities are widening while the poorest households risk sliding into destitution.”

Asset sales that come with the unwinding of the BOE’s quantitative easing program will provide enough monetary tightening to allow policy makers to wait until 2023 before moving rates above 0.5%.

Wages will not offset the combination of softening growth, tax rises and higher living costs, Niesr said. 

The removal of the temporary 20 pounds a week uplift in universal credit will mean welfare recipients not in work will be hardest hit while pensioners and other “in receipt of significant non-labour income” will be “relatively unaffected.”

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