An important question is whether the disruptions will have adverse secular consequences, aggravating long-standing economic and social fragilities.
The latest monthly macroeconomic economic numbers are far from encouraging. Ahead of this week’s data for May, inflation was already at 9% for April and is on the way to 11%, according to the Bank of England. Monthly gross domestic product growth has turned negative, falling 0.3% in April after its 0.1% contraction in March. This is fueling a general decline in confidence as mounting worries about future income growth compound what is now commonly referred to as the “cost-of-living crisis.” Led by the surge of food and energy prices, it is a crisis that hits the poorest and underprivileged members of society particularly hard.
Labor unions are fighting back against the realized and expected decline in real wages and, more generally, the erosion in standards of living. Wage demands are intensifying as are threats of disputes. This week, the nation is bracing for a near-total paralysis of the rail transport system because of the threat of three days of strikes starting Tuesday, compounded in London by a one-day stoppage in Underground service.
The comparisons to the Britain of the 1970s are many, with its winter of discontent, stagflation, real wage resistance and labor strikes. There are some important differences, however. For example, and unlike during the 1970s, automatically tying wages and salaries to a price index is not widespread; labor union membership is lower; and the credibility of the Bank of England is stronger.
As important as these differences are, they are likely to play out in the magnitude of the economic disruptions rather than their general characteristics. Indeed, there is little to suggest that the worrisome economic and social developments of the last few months will moderate in the short term. If anything, the expectation is for the situation to worsen before it begins to improve.
It is also important to remember that although many of the current causes of malaise are external to the UK and global in nature, they compound existing fragilities. These include years of low productivity growth, a growth model that is diminishing in effectiveness and has been further undermined in the last few years by disruptions to the trade relationship with the European Union, and significant inequalities among regions and along the income ladder.
The British economy is facing both immediate and longer-term challenges. Success in addressing them needs to be anchored by a medium-term vision centered on a new growth model that is designed for the changing structure of the economy, the need to counter the inequality trifecta — income, wealth and opportunity — and global secular changes related to technology, climate, population and health.
Without such a vision, there is an uncomfortable probability that a summer of discontent would aggravate secular headwinds to inclusive and sustainable growth that have long been in the making and have significant consequences.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. A former chief executive officer of Pimco, he is president of Queens’ College, Cambridge; chief economic advisor at Allianz SE; and chair of Gramercy Fund Management. He is author of “The Only Game in Town.”
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