Is a major recession unavoidable? Three economists give their viewsIs a major recession unavoidable? Three economists give their views

Is a major recession unavoidable? Three economists give their viewsIs a major recession unavoidable? ...

Right now, prices are going through the roof, but all signs suggest that the economy is weakening. This is not only to increase interest rates, but also to encourage people and businesses to spend less. The challenge for central banks is to try and deal with both issues at the same time.

Three economists discussed whether they saw a way of reducing inflation without causing a serious economic downturn. Heres what they say

Jonathan Perraton, a senior economist at the University of Sheffield, has been named the Senior Lecturer.

The Bank of Englands pledge to increase interest rates by a relatively modest 0.25 percentage points to 1.25% contrasts with the US Federal Reserves'' 0.75 points increase the day before, which suggests that economic growth will be weaker than previously predicted.

It follows the unexpected news that the UK economy fell by 0.4 percent in April, plus sobering projections from the Organisation for Economic Cooperation and Development (OECD) that the UK will be the worst performing major economy in 2023. GDP is now only fractionally above its pre-COVID level, and all major sectors are shrinking.

Despite inflation, the Bank of Englands caution is expected to rise to 11% in the coming months, which is not seen since the 1980s. The United Kingdom is experiencing one of the country''s highest inflation rates.

Inflation rates in the G20 are expected to be higher.

pressures on supply chains following COVID and higher energy and other commodity prices following Russia''s invasion of Ukraine are causing global warming. However, US economist Adam Posen believes Brexit is a key factor in explaining Britain''s relatively high inflation. This has resulted in higher trading costs, weak sterling, and labor shortages.

Unemployment has dropped to only 3.6 percent, although employment rates are still below pre-COVID levels, indicating that more people are inactive, particularly older workers. Personal shortages have become a major component of the British economy.

While this combined of low unemployment and unfilled jobs might increase wages, regular pay, excluding bonuses, decreased by 2.2 percent in real terms in June, the largest decrease in over 20 years. So this does not appear to be a traditional wage-price inflationary spiral, where firms give up demands from workers for higher pay, pay costs to consumers, and workers demand even higher wages to deal with problems. Having said, bargaining rounds are still to be completed and there are several issues.

Consumer demand has helped to stimulate economic activity in the United Kingdom, but this has partly been sustained by household savings. Some of this highlights the fact that households now spend more as COVID limitations have been lifted, but there are clear limits to how far households can dip into their savings as living standards are reduced. Not surprising, consumer confidence is falling.

Longer term issues persist, however, as UK productivity has been significantly down since the global financial crisis in 2008. There are a range of explanations, including shortcomings in capital investment and training, which are reflected in the current situation in filling positions.

The Bank of England is facing unprecedented challenges. Interest rate rises are a blunt tool to address supply-side problems in a British economy where growth is grinding to a deadlock. It is likely to fall on the government rather than the Bank of England to provide people with help.

Brigitte Granville, a professor of international economic and economic policy at the Queen Mary University of London.

Stagflation is approaching, so wherever will it be? debate must be whether or not we are on course for an episode as bad as the 1970s or even worse. My assumption is that recession is likely, but the experience of high inflation in the 1970s should be avoided. Nevertheless, even a relatively milder dose of stagflation will be a concern for living standards.

In this scenario, inflation would ease, and central banks might assist with the economy''s actual interest rate rises.

However, a rapid turnaround can be challenging: the context of the post-COVID recovery and the employment market.

Two factors on the global supply side have driven the main inflationary impulse: First, supply chains have struggled to cope with demand falling and resurging during and after COVID, which has been exacerbated by China''s zero-COVID policy. Second, Russia''s war in Ukraine and the Wests sanctions have caused further damage.

These inflationary concerns are being reduced by heightened demand from western firms and consumers due to COVID stimulus packages in the United Kingdom and particularly the United States, as well as unpaid income accumulated during lockdowns. In the United Kingdom, household deposit balances were still well above pre-COVID levels as recently as April.

It doesn''t help that the financial markets have been pushed to such highs by tight monetary policies. Despite the bubbles occurring recently, valuations will have to drop some way further before people become less willing to go out and buy goods.

The second obstacle to a rapid reversal of the inflation surge, namely the labor market, is the supply side. Part of this is because more people over 50 choose not to return to work, but the UK is confronted with a Brexit that disrupts the flow of good quality labor from Central and eastern Europe.

Businesses are being forced to pay people more in the UK, while while distributing the cost to customers in goods and services is a burden. The Bank of England has been alerted to a wage-price spiral in 1970s.

According to the closely watched Purchasing Managers Index, which reveals UK businesses'' optimism about the economy, shows that those in services are becoming gloomier in the coming months. You don''t keep increasing prices if you think people are going to stop buying. And while we may have seen faint echoes of the labour militancy in transport, pessimistic corporations are more likely to reduce hiring plans and output rather than give up huge wage demands altogether.

This appears to be more significant in determining inflation''s course, especially if it is a long-term structural issue, and if the post-COVID concerns should eventually be resolved. So, generally, I anticipate that the UK economies will return to the range of 2%, despite growing demand and credit. In the United States, where underlying demand and credit are stronger, significant interest increases may be required.

The main issue in my opinion is that central banks are becoming too aggressive about their 2% inflation goals. I used previous research to establish that inflation levels up to 5% cause little or no long-term damage to growth, particularly if the inflation rate is steady rather than volatile. So, central banks should stop increasing interest rates to avoid doing more harm than good.

Professor of Economics at Bath, Chris Martin

The UK labour market will be crucial to how the UK economy performs in the coming months, and its chances are well-balanced. On the one hand, the furlough schemes was a success, safeguarding the labor market from the worst losses that the recession experienced. Even though the economic contraction was significantly greater.

Jobs have improved more quickly than in previous recessions. Vacancies are over 50% higher than before the epidemic. Average wage excluding bonuses are increasing by about 4% per year, with continued growth for drivers and workers in construction, software development, and warehousing.

UK employment rate (%)

Employment is still lower than before the epidemic, with close to 250,000 workers. Real wages are still no higher than in 2008. And the macroeconomic context is gloomy: it is difficult to see how the labor market will prosper if growth is weak or non-existent.

The next few months will be difficult to assess because first, unemployment is no longer a useful labour market indicator. Workers are now categorised as employed, unemployed or inactive. Unemployed workers are actively seeking work, but the active are not. Of the 250,000 reduction in employed workers since 2019, 80% are inactive; only 20% are now unemployed.

Economists have a much less clear understanding of the inactive than the unemployed. This is because most people getting hired are from the inactive rather than the unemployed.

Second, perhaps surprising, Brexit has not reduced migration, but it has changed it. There are fewer EU citizens in the United Kingdom, but more workers from Nigeria, India, and other countries. They tend to be more skilled and proficient in health and social care rather than hospitality.

More skilled workers should be capable of work, especially in health and social care, but hospitality is dreading trouble at the same time. However, it is unclear if these changes are permanent, and this increases the employment market.

The behavior of vacancies and their relationship to hiring have also increased. The most recent data shows 1.3 million vacancies, about 40% higher than pre-pandemic. However, this has not resulted in a record number of workers being hired. We can no longer rely on high vacancy postings to increase employment.

Finally, a striking divide is opening between the public and the private sectors. Private sector employment is returning to pre-COVID levels, but public sector employment is still behind. Private sector employment is currently up by 8%, compared to just 1.5 percent for the public sector. Public sector employment is difficult to anticipate, given that it is immune to some of the market forces that drive the private sector, although there is little interest in continued growth in the coming months.

What are the chances of UK employment? Firstly, firms are likely to be looking for less employees as chronic investment and declining consumer expenditure lead to stagnant or decline in GDP.

These negative effects will be offset by the large number of companies currently being offered, as well as by relatively large wage rises in certain areas of the private sector. This may reintroduce some of the workers to return to the labour market after the epidemic.

On the back, I expect a reduction in employment of up to 100,000 workers in the coming months. That''s less than 0.1 percent, so it will not greatly exacerbate all other issues in the economy.

Jonathan Perraton, a senior lecturer in Economics at the University of Sheffield, Brigitte Granville, Professor of International Economics and Economic Policy at the Queen Mary University of London, and Chris Martin, Professor of Economics at the University of Bath

This article was once again republished from The Conversation under a Creative Commons license.

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