UK discontent risks compounding longer-term malaise

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It’s starting to look even more like the 1970s in the UK as the threat of nationwide rail strikes this week amplifies the already troubling sentiment stemming from high inflation and slowing economic growth. While there are significant differences from the 1970s, these are unlikely to be enough to prevent a “summer of discontent”, with a particularly heavy burden placed on the most vulnerable segments of the population.

An important question is whether the disruptions will have adverse secular consequences, deepening long-standing economic and social fragilities.

The latest monthly macroeconomic economic figures 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 turned negative, falling 0.3% in April after contracting 0.1% in March. This is fueling a general decline in confidence as growing worries about future income growth worsen what is now commonly referred to as the “cost of living crisis”. Led by soaring food and energy prices, this crisis is hitting the poorest and most disadvantaged members of society particularly hard.

The unions are fighting against the observed and expected drop in real wages and, more generally, against the erosion of living standards. Wage demands are intensifying, as are the threats of conflict. This week, the nation is preparing for a near-total shutdown of the rail transport system due to the threat of three days of strikes from Tuesday, compounded in London by a one-day disruption to Tube service.

There are many comparisons to the Britain of the 1970s, with its winter of discontent, stagflation, real wage resistance and labor strikes. There are, however, important differences. For example, and contrary to the 1970s, the automatic linking of wages and salaries to a price index is not widespread; union membership is lower; and the credibility of the Bank of England is stronger.

Important as these differences are, they are likely to play into the magnitude of the economic disturbances rather than their general characteristics. Indeed, nothing indicates that the worrying economic and social developments of the last few months will subside in the short term. On the contrary, the situation is expected 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 are aggravating existing fragilities. These include years of weak productivity growth, a diminishing efficiency growth model that has been further undermined in recent years by disruptions in trade relations with the European Union, and significant inequalities between regions and along the income scale.

The UK economy faces both immediate and longer term challenges. To succeed in resolving them, it is necessary to rely on a medium-term vision centered on a new growth model designed for the evolution of the structure of the economy, the need to counter the trifecta of inequalities – income, wealth and opportunities – and global secular changes related to technology, climate, population and health.

Without such a vision, there is an uncomfortable likelihood that a summer of discontent would aggravate the age-old headwinds to inclusive and sustainable growth that have long been brewing and have significant consequences.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg Opinion columnist. Former CEO of Pimco, he is President of Queens’ College, Cambridge; Chief Economic Advisor at Allianz SE; and president of Gramercy Fund Management. He is the author of “The Only Game in Town”.

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