Economic prospects in 2022: the New Weather Institute in the Financial Times survey

Each year the Financial Times polls a group of economic analysts on what they think the next year holds in store for the UK. The New Weather Institute is part of that survey published today, and here are our responses collected together. They argue that huge economic threats are balanced by equally large opportunities to solve multiple problems by investing in the economy’s low-carbon, rapid transition.

The economy: will the UK economy outpace or lag behind other developed economies in 2022 and why?

The UK is likely to lag behind other developed economies in things that matter – such as meeting climate targets and reversing inequality (or ‘levelling-up’) – because while the government is fond of making impressive-sounding promises, it appears allergic to developing and implementing the policies needed to make them happen.

The task of re-engineering the economy to operate within climate targets, reviewed only weeks ago at the critical Glasgow Climate Summit, has huge implications and opportunities across all sectors. Yet, as the chief executive of the official advisory body, the Climate Change Committee (CCC), said at the time, “The government is nowhere near achieving current targets.” The reason this matters so much is that, apart from being needed to preserve the ecological conditions in which the economy and society can function, it is now a binding macroeconomic frame with a target of cutting emissions 78% by 2035.

In Rishi Sunak’s Budget he famously failed to mention climate at all. Beer was referred to more than the critical threat to humanity. Instead of encouraging a shift from aviation to train travel, he halved air passenger duty on domestic flights – the most easily replaced by train travel.

But, as the CCC note, on current lack of progress, the UK will be adding to a target busting temperature rise of 2.7°C by century’s end. More worryingly the CCC say that this can ‘in theory’ be brought down to just under 2°C – but still well short of the 1.5°C needed.

For a rough handle on what this means in practice, for people in the richest 10% globally, emissions need to drop to one tenth of what they are set to be in 2030. Conveniently, a rule of thumb is that the carbon footprint of taking a train is one tenth that of flying. Emissions reductions are needed for the UK of something like 12% year on year.

But a quick look at recent government policy crumbles any confidence of a strong link between targets and action. In Rishi Sunak’s Budget he famously failed to mention climate at all. Beer was referred to more than the critical threat to humanity. Instead of encouraging a shift from aviation to train travel, he halved air passenger duty on domestic flights – the most easily replaced by train travel. The long-lived freeze on vehicle fuel duty was maintained, alongside spending to expand the road network that dwarves public investment in low carbon transport alternatives. These are all things which extend and lock-in the UK’s addiction to a polluting, high-carbon economy.

Compare this to the move in France to ban short haul, internal flights where a train journey alternative exists, or Paris’s plan for major car reduction that includes the removal of 70,000 car parking spaces. Or, the case of Oslo in Norway going substantially car free.

The UK also needs to guard against a rush of ‘greenwash’ and false solutions. Already there is far too much reliance on carbon offsetting, when a study for the European Commission showed that 85% of the offset projects failing to reduce emissions, and only 2% with a high likelihood of reducing emissions.

The CCC highlight a £50 billion annual investment gap up to 2030 for the UK to be on course to meet its targets. In the United States, although many were disappointed, President Biden’s Infrastructure Bill allocated over $100 billion towards public transport and rail – with job creation a major part of the rationale. If comparison with the US feels unfair, the UK government could do worse than look at South Korea’s green new deal investing over $60 billion to lower emissions and create 650,000 jobs by 2025.

By contrast, the UK Chancellor allocated £4.8bn to a levelling-up fund to cover the remainder of this parliament – which even when added to the modest sums for green spending, to use the language of budget commentary still looks like very small beer. It is also a missed opportunity to achieve multiple goals at once through investment in a green new deal that could target much needed home energy efficiency and renewable retrofits and green transport infrastructure. If the government is remotely serious about levelling-up, it’s worth remembering that post-unification, the levelling up process in Germany took around took €2tn over 25 years.

Monetary policy: to what extent will the Bank of England be in control of inflation by the end of 2022?

The Bank of England can influence but not fully control inflation. But, this matters less than it might appear for two reasons: firstly, fears of inflation are typically exaggerated and secondly, several other overdue shifts in the UK economy could guard against it and ensure that the more vulnerable in society are protected from its effects.

The products attributed with contributing to the recent rise in inflation are petrol prices, food prices, and clothing and footwear.

Where petrol prices are concerned this should, at least, be a very short term problem. Climate targets, air quality concerns and insulating the economy from fuel price shocks are all reasons to move rapidly beyond the UK’s current dependence on petrol as a major transport fuel. Fortunately, although late and delayed by manufacturers, the shift to full electric vehicles is finally accelerating, though from a low base. But, in terms of impacts, many of the poorest households don’t even own cars and in big cities like London, the majority, 60% live car free, or use cars for short journeys easily done in other ways.

An obvious risk mitigation strategy is for central banks to act to raise the cost of capital to polluting, high carbon activities and make it cheaper for clean, green economic activity central to rapid, low carbon transition

The long shadow of Brexit still hangs over retail prices with problems of supply, administration and distribution, such as driver shortages. It’s possible to see some of these being increasingly worked around. But again there is a risk of seeing the issue in isolation from real world problems. Cheap, fast fashion, for example, is heavily linked to the exploitation of workforces, huge volumes of waste and ecological damage. Any effective response to this speaks also to the issue of price – we should be consuming less of such products and making them last longer – shifting to a consumer culture that embraces greater agency in terms of care and repair, and business models based on the circular. Connected but different dynamics relate to the food issue – where there is also enormous waste. In terms of the share of income spent on food, today’s prices are historically very low. But for people living in food poverty, any price rises are harsh, and this is where a more meaningful ‘levelling-up’ agenda matters more. A shift to a more sustainable food and farming culture is something that anti-poverty, climate and farming campaigners agree on.

This may all seem very far from the Bank of England’s direct responsibility and control, except that both working alone, and in collaboration with the Treasury, there are many ways in which, the Bank of England could both be more in control of inflation where it matters (such as its effects on low income households, or in potentially making more environmentally sustainable choices harder) – and help to propel other needed shifts in the economy.

For example, the Bank has an increasingly sophisticated take on the ‘financial risks and economic consequences’ of the climate emergency and how these matter for the Bank’s ‘mission to maintain monetary and financial stability.’ An obvious risk mitigation strategy is for central banks to act to raise the cost of capital to polluting, high carbon activities and make it cheaper for clean, green economic activity central to rapid, low carbon transition. I’ve argued elsewhere that this means we need ‘ecological interest rates’ to deliver that. There is a need for a huge expansion in the availability of climate friendly goods and services. The challenge for the Bank, from an inflation-control point of view, is ensuring sufficient economic stimulus to make them available (given inflation results from too much money chasing too few goods). For this the Bank could also experiment more with its second tool of monetary policy, making more targeted use of QE, for example by helping to capitalise the new National Infrastructure Bank if it is given an explicit role to finance low carbon sectors. In tandem, the Treasury should also act on the Climate Change Committee’s recommendation on the ‘phase-out of inefficient fossil fuel subsidies’ by reviewing the role of tax policy.

Living standards: to what extent will the UK look like a high wage, high productivity economy at the end of 2022 – and will people feel better or worse off than they do now?

It is unlikely that the UK will look more like a high wage, high productivity economy at the end of 2022 than it does now, but we should not assume that the pursuit of both objectives are necessarily compatible, or that they are the best, or a guaranteed way of making people ‘feel better off’.

What needs addressing is how the already-wealthy are capturing a disproportionate share of the benefits of economic activity. Something which has been happening for a generation, but which seems to have been further entrenched during the pandemic.

With the poorest half of UK families being £110 worse off since the General Election in 2019 while the top five per cent are an estimated £3,000 better off. Those hit by changes in Universal Credit have not seen their losses compensated for by other changes. This is where the costs can be seen of the failure to deliver on the UK’s low carbon, rapid transition and levelling-up agendas. Both of which should be creating good quality new jobs where they are most needed.

Alongside the trauma of the pandemic, people have glimpsed other possibilities for quality of life beyond consumption alone… They have also seen a wider range of economic possibilities with experimentation in basic income schemes, and the state demonstrating that it can, in fact, be a wage payer of last resort.

With the Office for Budget Responsibility still pointing to rising unemployment this winter, an obsession with productivity – producing more stuff with fewer hands – doesn’t in any way guarantee increasing the number of people getting a living wage, for one simple reason that it drives the technological displacement of employees. Productivity is a bit like cleanliness, hard to argue against. But, like cleanliness too much of which can undermine your immune system, in an economy suffering both overconsumption and under-employment, you can have too much of a good thing.

Also, alongside the trauma of the pandemic, people have glimpsed other possibilities that raise questions of quality of life above those of consumption alone, or its euphemism, ‘standards of living’. They have also seen a wider range of economic possibilities with experimentation in basic income schemes, and the state demonstrating that it can, in fact, be a wage payer of last resort.

Beyond the point that our basic material needs get met, whether we ‘feel better or worse off’ is determined by a huge range of factors beyond income. How relatively precarious or secure is our employment and income is one thing. Working from home more where the nature of work allows it, lowering the time, money and stress spent commuting is another. Having more time as a result to spend on friendships, family, cooking, our own interests or a walk in the park are others still.

The urgent and inescapable economic tasks are reversing the destabilising dynamic of rising inequality while re-engineering business, finance, our lifestyles and livelihoods to avoid climate and ecological breakdown.

All these things influence how we should be designing the green, high well-being economies we need. And it could be that the experience of the last two years means that people will be unwilling to tolerate the dated mantras of the old economy that seem to involved ever greater sacrifice by the many for the profit of the few.

As a foundation for feeling better off and desirable economic goal, a shift to available work being better shared through a reduction in the working week, underpinned by access to a combination of universal basic services and income, may well displace the formerly hypnotic aim of high income, high productivity.

Is there anything else you would like to tell us?

The terms of current economic commentary seem chronically disengaged from the real world of pandemic shocks, corrosive social inequality and the epochal challenge of the climate emergency. The old obsessions of growth, productivity and inflation remain entrenched. But the urgent and inescapable economic tasks are reversing the destabilising dynamic of rising inequality and doing so while re-engineering business, finance, our lifestyles and livelihoods to avoid climate and ecological breakdown. On one level this is being increasingly acknowledged by policy makers and financial institutions, but there is still scant sign that in the UK we are overcoming the inertia of an economy that seems to function as an engine of inequality and ecological degradation.

Andrew Simms is a co-director of the New Weather Institute and a Research Associate at Sussex University’s Centre for Global Political Economy

(Photo: Andrew Simms, from the walkway at the Glasgow, 2021, COP 26 climate summit)