We’ve heard lots of recent comparisons between today and 1976, given the heatwaves and drought that affected both years, and that 2022 is the UK’s driest year since. But whilst we have recently been basking in sunshine and dealing with the impact of the warm weather, it is the cost of heat, light and food for households this winter that should be on all of our minds.
We are after all currently experiencing the worst inflation since the late 1970s and the spectre of industrial action has also returned; albeit not on the scale of the 70s. I’ve been working as an economist for the last 25 years – for those with long memories they will realise that this period has included the credit crunch / global financial crisis, housing crash, Eurozone debt crisis, Brexit, Covid and a war in mainland Europe – and today is the most concerned and worried I have ever been about the near-term economic outlook from the perspective of its potential impact on people.
For those who weren’t worried about how households would fare this winter, the Bank of England’s latest economic forecasts should have acted as a wake-up call. The Bank broke convention by proactively stating that the economy is going into recession. Normally the R word is only mentioned by the central bankers after it has actually happened. Indeed, the Governor said that the UK economy will experience five consecutive quarters of contraction and that inflation will exceed 13 percent. Household incomes are therefore set to experience the biggest fall in real terms since records began.
In terms of GDP, it is expected by the Bank to contract in 2023 and 2024, which if it comes to pass would mark the first two years that the UK has seen back-to-back economic falls since the 1960s. (My view is that a recession in Northern Ireland is now unavoidable, and we could see the NI economy contract by up to two percent next year; depending on what measures are introduced in an Emergency Budget.) Andrew Bailey also called out that future pricing for gas at the end of 2022 has increased to seven time what it was a year ago. This is expected to push the average UK energy bill to over £4,400 per annum – this highlights the scale of the crisis that is coming this winter. And Northern Ireland faces perhaps an even bigger challenge given that households here spend a higher proportion of disposable income on energy. Asda’s Income Tracker revealed that Northern Ireland posted the steepest fall in discretionary income (after tax and essential spending such as food, housing and utility bills)) of all the UK regions with an annual decline of almost one-third in Q2 2022. And this comes whenever the Bank of England is hiking interest rates with the recent 0.5 percent increase being the biggest since 1995, with more set to come.
The impact of this on people will be significant. The recession might not be as long and deep as it was after the property crash in Northern Ireland; and unemployment won’t be anything like it was in 1970s or 80s or ten years ago. This time around though, it won’t just be about whether you lose your job or not; even those who retain their jobs will be severely hit by the sharply rising cost of living. Arguably this recession could be the most damaging in a generation in its impact on people. And this will have implications right across the economy.
Business conditions are deteriorating – this was evident in the most recent Northern Ireland PMI which showed that all sectors saw output fall sharply, and this was most marked in retailing. In consumer sensitive sectors such as retail and hospitality, firms are facing the worst of both worlds. Their cost bases are rising dramatically, making their products and services more expensive and therefore less attractive to consumers. At the same time, their customers are seeing their disposable incomes eroded by inflation, making them less likely to spend on things that aren’t essential. Those firms most reliant on discretionary consumer spending – such as restaurants, beauticians or home improvement suppliers – will be most vulnerable. Consumers spent big on home improvement during the pandemic, making use of the ‘forced savings’ accumulated during lockdown to improve their homes. The market was therefore very hot during the pandemic but a drought in consumer spending awaits. One silver lining might be that getting a handyman/person could become much easier.
Households most impacted by the cost-of-living crisis will be looking forward to receiving the much-talked-about £400 government energy bill support. For context, that is worth four-times the much-hyped high street voucher. However, whilst it will certainly be welcome, it will not prevent a surge in fuel poverty and financial distress. Some have predicted a situation where households are forced to turn their heating off during the winter with severe implications for health and wellbeing. This will clearly be more severe the harsher the weather; so we will all be praying for a mild winter. Others have predicted that households will be forced to use their credit cards and get personal loans to cover essentials such as heat and food. For many the purchase of big ticket items will be deferred. We will also likely see a rise in applications for mortgage repayment holidays for those who have a mortgage. Those in the private rented sector and who don’t have a mortgage clearly don’t have this flexibility.
In this context, there will be sharply rising demand for food banks and other support. The scale of the crisis means that there should be large scale planning to cope. One thing that government should be considering is communal spaces for people who can’t afford to heat to their own homes to go to for warmth. We talk about heating homes a lot; perhaps we need to change the terminology to ‘heating people’. There may not be much light at the end of the tunnel, but we will see some measures in an upcoming emergency budget to soften the impact a bit. People in Northern Ireland will also be looking to Stormont to deliver an Executive and some specific local measures to help. During this time of national and regional emergency, an Executive is conspicuous by its absence. And as the crisis gets worse, the questions about what our politicians are doing to help will intensify.
We thought the era of austerity had passed. But we are in a new era of inflation-induced household austerity. And this comes on top of the Covid legacy and Brexit challenges. It will only get worse and will be with us for several years to come.
This article appeared in the Irish News Business Insight on 16th August 2022.