Economic inactivity has been increasing in the UK. This Insight discusses why young people may not be entering the workforce after leaving education.
The economic news in the UK this month has told a story of figures staying largely the same.
Economic growth as measured by GDP has remained mostly flat, while inflation and economic inactivity have not come down. However, there are hints of movement on the way, both in economic inactivity and in monetary policy.
This Insight covers April’s economic figures for recent months and looks at possible changes in the near future.
Economy avoids recession but stays mostly flat
The latest GDP figures from the Office for National Statistics (ONS) on 13 April show that although the UK economy isn’t shrinking, it isn’t growing either. As the chart below shows, the trend of GDP growth that was halted by the Covid-19 pandemic has yet to restart, and there was no net growth at all in the estimated figure for February 2023.
It now seems likely that the UK’s economy did not shrink during the first three months of 2023, as earlier forecasts suggested it might. The Chancellor said in his response to the figures that the UK was “set to avoid recession”.
However, the lack of growth still leaves the UK behind other major economies. In its most recent World Economic Outlook, the International Monetary Fund (IMF) forecast that the UK would have the lowest GDP growth in the G7 in 2023 (-0.3%; Germany is the only other G7 member whose economy is forecast to shrink) and the second lowest in 2024 (+1.0%, ahead of Italy with +0.8%).
Despite the low growth, there are signs that activity in several parts of the economy may be picking up. The S&P Global/CIPS Purchasing Managers’ Index, a measure of business activity, showed growth above forecasters’ expectations in the flash estimate for April (PDF).
Consumer confidence also rose, as measured by the GfK Consumer Confidence Index, and retail sales rose in the three months to March 2023 compared with the previous three months.
Stubbornly high inflation may mean another base rate rise
The consumer prices index of inflation (CPI) stayed in double digits in March (10.1%) for the seventh month in a row. The CPI is widely expected to start to fall soon, although this is largely because it is unlikely that energy prices will rise as fast this year as they did in 2022 following Russia’s invasion of Ukraine. As the chart below shows, energy price inflation is closely linked to the Ofgem price cap, which has increased in very large jumps in recent months.
So-called “core” inflation, which excludes items with very changeable prices like food, energy and alcohol, was 6.2% in March 2023, the same rate as in April 2022. Food prices remain very high; inflation in food and non-alcoholic beverages reached 19.1% in March, which was estimated to be the highest rate since 1977.
This persistently high inflation means that the Bank of England’s Monetary Policy Committee (MPC) is widely expected to raise the Bank’s base interest rate once more in its May policy meeting. If it does, the committee will have increased the base rate 12 times in a row. Some forecasters, including Capital Economics and ING, say that rate rises beyond this are less likely, and that the base rate may fall back again in the coming months.
Long-term illness holds back the labour market
Recent figures from the ONS show a decrease in economic inactivity (which refers to people without a job and not looking for one). Both the employment and unemployment rates in December 2022 to February 2023 were slightly higher than the previous three months as people who were economically inactive re-entered the labour market.
As the chart below shows, economic inactivity has decreased overall because the number of people inactive because they are students has fallen. The number inactive because of long-term sickness has continued to rise and is currently at a record high level (about 415,000 higher than it was before the pandemic).
Although the employment rate has increased, it is still below where it was before the pandemic. According to the Institute for Employment Studies labour market statistics, the UK is now the only major economy where this is the case. The same report suggests that disadvantaged people may not be sharing in the labour market’s recovery, and that this may be holding back growth.
- House of Commons Library, Rising cost of living in the UK
About the author: Philip Brien is a researcher at the House of Commons Library, specialising in spending
Photo Credits: (© Marion – stock.adobe.com).
Economic inactivity has been increasing in the UK. This Insight discusses how people leaving the workforce because of ill-health affects economic inactivity.
Economic inactivity has been increasing in the UK. This Insight discusses why older workers may have left the workforce and whether they might return to work.