It’s true to say the UK has become worse off. But some have felt the brunt more than others
When Huw Pill said, in a recent Columbia University podcast, that British people need “to accept that they’re worse off” the comments understandably hit a raw nerve.
With the country going through a once-in-a-generation cost of living crisis, it’s hardly palatable to be lectured by a very well-paid former Goldman Sachs banker that we all need to live a little less extravagantly.
But while Mr Pill’s comments were delivered with his foot firmly lodged in his mouth, there is an important truth lurking beneath them.
That truth is that the country as a whole is undoubtedly worse off as a result of the sharp increase in energy prices recently. Simply put, these days we import a lot of our energy, mostly in the form of natural gas.
And since those energy prices have risen so sharply, we are all having to pay more for our goods and services without earning more money in return. We – by which I mean the country as a whole – are all poorer.
You get a sense of this when you look at Britain’s national income – the amount of cash we’re generating here in the country – and subtract the amount of cash we consumers tend to spend each year.
The chart you end up with looks somewhat terrifying: a cliff-edge line of the likes we’ve never seen before. This is a pretty good illustration of how dramatically our collective net worth has fallen in the past year or so.
Yet saying the country as a whole is poorer is not the same as saying everyone is feeling the squeeze in quite the same way.
Indeed, look at the impact of this loss of collective worth and you see big differences. A few companies (and their employees and shareholders), notably energy producers, have done very well out of the price spike. Most have not.
In much the same way, the pain of higher prices is felt differently at different income levels. Inflation, remember, is the rate at which prices are going up each year.
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But the extent to which different income groups have leeway, either through their earnings or their savings, to shoulder that increase, differs greatly.
Study after study has shown that lower income groups are feeling the impact of higher energy and food prices considerably more than higher income groups.
Broadly speaking, those in the upper end of the income distribution (which, for what it’s worth, includes pretty much all Bank of England economists) have seen significantly smaller falls in their spending potential than those at the lower end. The country has become worse off, but some have felt the brunt of it more than others.
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These are what economists would tend to call “distributional” issues: how the benefits (or in this case pain) of an economic phenomenon are distributed out among the population.
Typically, the Bank of England tends to focus less on such issues than the big picture – that nationwide story about how we are, in aggregate, all worse off.
Not, it’s worth saying, because they’re heartless and don’t care, but because they view such challenges as something democratically elected politicians should be addressing rather than ivory tower academics in Threadneedle Street. Which is fair enough.
However, the cost of living crisis is two things at once: a big, macroeconomic phenomenon (the country has become poorer) and a distributional phenomenon (some people are feeling the pain more than others).
Mr Pill’s main mistake was not to be clearer that he was talking about the former issue, without being clearer that he wasn’t trying to pass judgement on the latter.
Still, it’s not the first time someone from the Bank of England has said something indelicate and insensitive at a time of nationwide economic insecurity – and it’s unlikely to be the last.
The UK economy unexpectedly shrank in May, even after the worst of Donald Trump’s tariffs were paused, official figures showed.
A standard measure of economic growth, gross domestic product (GDP), contracted 0.1% in May, according to the Office for National Statistics (ONS).
Rather than a fall being anticipated, growth of 0.1% was forecast by economists polled by Reuters as big falls in production and construction were seen.
It followed a 0.3% contraction in April, when Mr Trump announced his country-specific tariffs and sparked a global trade war.
A 90-day pause on these import taxes, which has been extended, allowed more normality to resume.
This was borne out by other figures released by the ONS on Friday.
Exports to the United States rose £300m but “remained relatively low” following a “substantial decrease” in April, the data said.
Overall, there was a “large rise in goods imports and a fall in goods exports”.
A ‘disappointing’ but mixed picture
It’s “disappointing” news, Chancellor Rachel Reeves said. She and the government as a whole have repeatedly said growing the economy was their number one priority.
“I am determined to kickstart economic growth and deliver on that promise”, she added.
But the picture was not all bad.
Growth recorded in March was revised upwards, further indicating that companies invested to prepare for tariffs. Rather than GDP of 0.2%, the ONS said on Friday the figure was actually 0.4%.
It showed businesses moved forward activity to be ready for the extra taxes. Businesses were hit with higher employer national insurance contributions in April.
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The expansion in March means the economy still grew when the three months are looked at together.
While an interest rate cut in August had already been expected, investors upped their bets of a 0.25 percentage point fall in the Bank of England’s base interest rate.
Such a cut would bring down the rate to 4% and make borrowing cheaper.
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Analysts from economic research firm Pantheon Macro said the data was not as bad as it looked.
“The size of the manufacturing drop looks erratic to us and should partly unwind… There are signs that GDP growth can rebound in June”, said Pantheon’s chief UK economist, Rob Wood.
Why did the economy shrink?
The drops in manufacturing came mostly due to slowed car-making, less oil and gas extraction and the pharmaceutical industry.
The fall was not larger because the services industry – the largest part of the economy – expanded, with law firms and computer programmers having a good month.
It made up for a “very weak” month for retailers, the ONS said.
Monthly Gross Domestic Product (GDP) figures are volatile and, on their own, don’t tell us much.
However, the picture emerging a year since the election of the Labour government is not hugely comforting.
This is a government that promised to turbocharge economic growth, the key to improving livelihoods and the public finances. Instead, the economy is mainly flatlining.
Output shrank in May by 0.1%. That followed a 0.3% drop in April.
Ministers were celebrating a few months ago as data showed the economy grew by 0.7% in the first quarter.
Hangover from artificial growth
However, the subsequent data has shown us that much of that growth was artificial, with businesses racing to get orders out of the door to beat the possible introduction of tariffs. Property transactions were also brought forward to beat stamp duty changes.
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In April, we experienced the hangover as orders and industrial output dropped. Services also struggled as demand for legal and conveyancing services dropped after the stamp duty changes.
Many of those distortions have now been smoothed out, but the manufacturing sector still struggled in May.
Signs of recovery
Manufacturing output fell by 1% in May, but more up-to-date data suggests the sector is recovering.
“We expect both cars and pharma output to improve as the UK-US trade deal comes into force and the volatility unwinds,” economists at Pantheon Macroeconomics said.
Meanwhile, the services sector eked out growth of 0.1%.
A 2.7% month-to-month fall in retail sales suppressed growth in the sector, but that should improve with hot weather likely to boost demand at restaurants and pubs.
Struggles ahead
It is unlikely, however, to massively shift the dial for the economy, the kind of shift the Labour government has promised and needs in order to give it some breathing room against its fiscal rules.
The economy remains fragile, and there are risks and traps lurking around the corner.
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Concerns that the chancellor, Rachel Reeves, is considering tax hikes could weigh on consumer confidence, at a time when businesses are already scaling back hiring because of national insurance tax hikes.
Inflation is also expected to climb in the second half of the year, further weighing on consumers and businesses.
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