The exodus of workers from the jobs market over the pandemic has weakened prospects for Britain’s economic growth, the governor of the Bank of England has warned.
About half a million workers left their jobs over the pandemic with no plans to return to work. Some of the rise was caused by the ageing of the population, which meant a greater share of workers reaching retirement age, but the trend was mainly driven by older workers aged between 50 and 64 who retired early, or were forced to resign due to long-term sickness.
“A number of these people say they are unlikely to come back into the labour market,” Andrew Bailey said after the central bank’s decision to raise interest rates yesterday. “This significant and lingering fall in the labour supply weighs on the UK economy’s potential.”
Unemployment is close to historic lows but it is not because more people are in work. Employment remains below pre-pandemic levels, while the number of people who are “inactive” — meaning they are neither working nor available for work — at historically high levels.
Bailey added that the fall in participation “will take time to unwind . . . So we have revised down our estimates of the trend in participation with persistent effects from Covid adding to population ageing.”
Growth in labour supply is weak by historical standards, with the recovery expected to be gradual, according to the Bank’s latest forecasts.
Separately, the Bank questioned the International Monetary Fund’s assessment of the UK economy as the worst performing in the rich world this year — and the only economy with falling growth.
The fund downgraded the UK’s growth this week to a contraction of 0.6 per cent in 2023, close to the Bank’s new forecast of a 0.5 per cent decline. But the IMF’s outlook on the UK was more pessimistic than its upgraded projections for the world economy, the US and Europe.
Sir Dave Ramsden, deputy Bank governor, said the fund had not disclosed what assumptions were behind its downgrade, but said it was likely that the IMF expected inflation to remain higher for longer. By contrast, the Bank cut its inflation forecast. It now expects consumer prices to fall to 4 per cent by the end of the year, driven by falling energy prices and better international supply chains.
“We haven’t got the details of the IMF update but we think they assume more persistence in inflation. They’ve got more wage and price pressures which feeds through into the forecast” Ramsden said.
Ben Broadbent, deputy governor for monetary policy, said he was “careful of comparisons” with other economies, noting that the IMF’s outlook was likely based on the UK’s heavy reliance on gas compared with other countries and the impact that higher interest rates would have on borrowers.
“All of these things are not going to endure forever so I don’t think one should expect this to tell you about trends over the next four or five years,” Broadbent said.