An ageing population, weaker migration inflows since Brexit and a sicker society due to the pandemic has damaged the UK long-term economy’s health, top City economists have warned.
A steadily rising elderly population has resulted in a jump in Brits leaving the jobs market to take retirement or due to ill health, putting the workforce on a downward trend, according to investment bank Goldman Sachs.
“The share of the UK population aged 50 and above has increased meaningfully over the past decade from 42 per cent in 2010 to 47 per cent in 2020 and is projected to grow further going forward,” Goldman said in a note.
Weaker inflows of EU workers since the Brexit vote in 2016 has not been fully offset by a rise in people from outside the bloc, constraining growth in the UK’s working age population.
Figures from the Office for National Statistics last month revealed net migration last year hit 504,000, the highest on record, although that number was boosted by an influx of Ukrainian and Hong Kong refugees.
International students flowed into the UK after being confined to their home nations during the pandemic, providing a further boost to last year’s net migration figures.
A jump in long term illness, primarily caused by people suffering from long-Covid and struggling to receive routine care due to swelling NHS backlogs amassed during the pandemic, has also reduced the number of available staff.
Britain’s workforce is still 2.7 per cent smaller compared to pre-pandemic levels, 60 per cent of which can be attributed to Covid-related factors, Goldman said.
However, “even without the pandemic, ageing and slowing population growth, including due to lower migration, were likely to reduce labour force growth meaningfully,” the note said.
A smaller workforce poses serious long-term problems for the UK economy. It would cut the volume of goods and services the country is able to produce, choking off GDP growth, likely resulting in sluggish real income improvements.
The Bank of England estimates the UK’s growth potential will be substantially lower over the coming decade compared to previous years, driven by a smaller workforce and anaemic productivity growth.
The Bank would likely have to keep interest rates to higher levels to cool demand in response to weaker supply to stamp out high inflation, Goldman said.
Rate setters have most of this year argued businesses are hiking pay to outbid rivals in the race for talent, which may force firms to raise prices, embedding high inflation, already running at 11.1 per cent, a 41 year high, into the UK for years.
Former member of the monetary policy committee and now senior economic adviser to Oxford Economics Michael Saunders in a note last week said weaker potential output growth was rightly identified by former prime minister Liz Truss, but her “diagnosis was probably wrong, and her proposed ‘solutions’ threatened to make matters worse”.
Truss tried to cut red tape and slash taxes, which Saunders argued “could make it harder for the UK to increase trade openness, because a perception that the UK is seeking to undercut other countries’ standards would probably limit scope for deeper trade deals”.
Boosting public investment in infrastructure would expand the UK’s supply-side potential, Saunders said.
Chancellor Jeremy Hunt and Rishi Sunak in last month’s autumn statement slashed government investment spending around 20 per cent in real terms.
Truss’s backers argue easing the tax burden on businesses would strengthen investment incentives by allowing them to retain more profit, reducing the need for the government to step up public spending.