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The state of the UK & global economy. And inflation is rising but are wages? Listen to our podcast interview with economist, Vicky Pryce
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The state of the UK & global economy. And inflation is rising but are wages? Listen to our podcast interview with economist, Vicky Pryce

Welcome to our #120 weekly newsletter.

“For women taking control of their financial future”

-Jana Hlistova


From The Purse


In this week’s newsletter, we spotlight our interview with Vicky Pryce, who is Chief Economic Adviser and a board member at the Centre for Economics and Business Research (CEBR) in the UK.

We talk to Vicky about the UK & global economy, the surge in inflation, wages, the risk of stagflation and whether we are headed for a recession.

Listen to the full interview here.

There is no question, we are in a tough economic climate right now. Make sure you take the time to absorb as much information as you can, so you make good decisions for yourself financially.

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And you can review the news in brief so you stay on top of global financial, economic and investing trends.

I hope you enjoy this week’s newsletter.

Until next week,

Jana


The state of the UK & global economy. And inflation is rising but are wages?

Economist, Vicky Pryce talks about the UK & global economy and what to expect in the years ahead.


We recently interviewed Vicky Pryce on The Purse Podcast.

Vicky Pryce is Chief Economic Adviser and a board member at the Centre for Economics and Business Research (CEBR). 

She was previously Senior Managing Director at FTI Consulting, Director General for Economics at the Department for Business, Innovation and Skills (BIS) and Joint Head of the UK Government Economic Service. Before that she was Partner at the accounting and consulting firm KPMG after senior economic positions in banking and the oil sector. 

We talk to Vicky about the UK & global economy, inflation, wages, the risk of stagflation and whether we are headed for a recession.

The following is an extract from the interview which has been edited in parts for ease of reading (only):

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Question: Can you share a summary of where the UK and global economy is right now? And what's happened to get us to where we are today?


Vicky’s answer:

We have seen a slow down in the pace of recovery.

We had done reasonably well as the world economy was coming out of COVID and it looked like it was going to continue through 2022.

In most countries, we had gone back to pre-pandemic levels by the end of 2021.

China recovered much earlier than anyone else and so did the US. But it was much more difficult in places like Europe which was still struggling with loads of restrictions. The easing of those restrictions happened a bit later in some countries.

But overall we were getting back to some sort of normality.

The one worry that everybody had was that inflation was picking up because supply could not meet the demand for so many months. And we had supply chain problems.

We had an increase in energy costs, we had food prices go up.

But this was more or less to be expected because there would be a period where supply and demand would not be in balance.

Central bankers (and everyone else) were just waiting for that to sort itself out. And then of course, we had the war in Ukraine and the Russian invasion that took place in late February.

And that changed the picture significantly.

There is a real slowdown in that pace of growth and people are talking about stagflation, not growth anymore.

We expect to see very little improvement in activity and high inflation, which many fear will be very difficult to control.


Question: So let's talk about inflation because we're at 9% CPI as of April (UK). And I remember we talked about whether inflation was going to be transitory or not. And certainly the narrative that we were hearing in the UK (and globally) was that inflation was going to be transitory ie nothing to worry about.

So what's going on there? And can we get it back down to the target 2%, because that's what the Bank of England (BoE) is ultimately aiming for. Is that realistic? Some believe that we're unlikely to ever get back to 2%.


Vicky’s response:

When you look at some of the folks that are still there now, including from the International Monetary Fund (IMF), the Bank of England (you mentioned), they expect we get back to target ie 2% inflation, in the next couple of years.

In fact, by 2023 we will be more or less there or just above it. And a year later we may well be below it.

It is not so much the raising of interest rates… but the general slow down in confidence in business and consumer intentions: this is not looking particularly good right now, as well as the ‘cost of living crisis’ which everyone has to bear right now globally.

Therefore a slowdown in demand is the real worry behind the developments that we are seeing at present.

Interest rates may accelerate that, but there is already a trend which suggests we are going to see quite a substantial slow down in growth over the next year or so.

And if that is the case, inflation will inevitably start coming down as well (in theory).

So, yes: getting back to (the 2%) target may well happen, even if we don't see dramatic increases in interest rates.

That of course depends hugely on the assumptions being met which includes an end of the war at some point (but it looks like it is going to last a lot longer), and a return to some normality in prices, particularly oil prices.

There is an attempt to make up for some of the Russian oil from production in the Middle East and that quite a lot of supplies of liquefied natural gas (that was coming and going to the Far East in the past), diverted to places like Europe which is so dependent on gas from Russia.

And all that may ease some of the pressures that we're seeing right now, in addition to seeking alternative sources. Both in fact for energy, but also for food.

I think this is going to take quite some time. And then perhaps some of their assumptions may not be met and we may see high prices for longer than people are expecting.

And if that is the case, returning to target may take a little bit longer. But the most important thing right now is that the economy continues to function.

Rather than just focus on bringing inflation under control, (if the cost of doing so is too great), we should be slightly more relaxed about it and look more at growth, employment.

But right now, we're in a position of crisis yet again.


Question: Are we seeing an increase in wages?


Vicky’s answer:

There is definitely an increase in what people are getting paid right now to make up (in part) for the rise in inflation.

But in the UK, wages are not going up in line with inflation.

If you look at the latest data, (if you exclude bonuses), wages have increased by just under 5%, which is not particularly high given inflation is 9%+ in this country (and likely to go up). The Bank of England expects inflation will be over 10% later this year.

So there is a real squeeze in income.

And it is worth pointing out that this is unequally distributed. If you look at bonuses added to the overall wages, then they are doing okay: they are, more-or-less, keeping up with inflation.

But of course, bonuses are being given in particular parts of the economy, mainly the financial sector and perhaps business services.

Sectors such as hospitality and tourism are picking up in terms of wages very slowly but they are still way below the rate of inflation ie I get in very little in terms of increases in pay.

If you look at the public sector (UK), you still have all sorts of constraints in terms of how much of an increase workers can get. There has been a freeze for a while (or at least a partial freeze).

The likelihood of wages going up to be in line with inflation, is not great. And we are starting to see a number of areas where social and industrial unrest is taking place.

If we consider Europe, it is even worse. In fact, wages are rising much more slowly than expected.

Of course, employment in Europe overall is higher. It is 6% or 7% on average (which is not bad). But of course, in the UK unemployment is 3.7%, which is similar to the US so the stress isn't as great in terms of staff shortages that we've got here. So wages are not rising anything like as fast.

And if that's the case, we don’t have an inflationary spiral that would come as a result of having persistent high prices, because demand for wages is a bit more subdued.

So what you have is high inflation, but no real push from wages at the moment. This could of course change quite significantly, but this is not happening right now.

This is one of the reasons why people think that perhaps inflation is transitory, because it will not take hold the way it did back in the 70s and early 80s.

And if the assumptions about an end to the war and so on are correct, we expect inflation to fall quite sharply.

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Click here to listen to the full interview with Vicky Pryce.


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The Purse Podcast


We cover the following in our conversation:

  • The UK & global economy

  • Inflation: can we get it down to 2%?

  • Slow economic growth & stagflation

  • Are we headed for a recession?

  • And more

Please enjoy! Listen on Apple Podcasts and Spotify+


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