UK’s discontent risks deepening a longer-term malaise

Disruptions may have adverse consequences, aggravating long-standing economic fragilities

Published : 26 Jun 2022 08:54 PM

Mohamed A. El-Erian

More rail strikes are extremely likely if talks between rail bosses and unions continue to fail, the union at the centre of the dispute has said. Maritime and Transport Workers boss Mick Lynch accused the government of blocking a deal, a claim denied by the government. The National Union of Rail, Maritime and Transport Workers is a British trade union covering the transport sector.

For the second time this week a walkout by rail workers has left travellers facing another day of disruption. Trains have ground to a halt across much of England, Wales and Scotland, with about half the network closed. Another walkout is already planned.

It is starting to feel even more like the 1970s in the UK as the threat of nationwide rail strikes this week amplify the already unsettling feeling stemming from high inflation and slowing economic growth. While there are some important differences with the ‘70s, these are unlikely to be enough to preclude a “summer of discontent,” with a particularly heavy burden imposed on the most vulnerable segments of the population.

there is an uncomfortable probability that a summer of 

discontent would aggravate secular headwinds to inclusive and 

sustainable growth that have long been in the making and have 

significant consequences

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

The latest monthly macroeconomic economic numbers 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 has turned negative, falling 0.3% in April after its 0.1% contraction in March. This is fuelling a general decline in confidence as mounting worries about future income growth compound what is now commonly referred to as the “cost-of-living crisis.” Led by the surge of food and energy prices, it is a crisis that hits the poorest and underprivileged members of society particularly hard.

Labor unions are fighting back against the realised and expected decline in real wages and, more generally, the erosion in standards of living. Wage demands are intensifying as are threats of disputes. This week, the nation is bracing for a near-total paralysis of the rail transport system because of the threat of three days of strikes starting Tuesday, compounded in London by a one-day stoppage in Underground service.

The comparisons to the Britain of the 1970s are many, with its winter of discontent, stagflation, real wage resistance and labour strikes. There are some important differences, however. For example, and unlike during the 1970s, automatically tying wages and salaries to a price index is not widespread; labour union membership is lower; and the credibility of the Bank of England is stronger.

As important as these differences are, they are likely to play out in the magnitude of the economic disruptions rather than their general characteristics. Indeed, there is little to suggest that the worrisome economic and social developments of the last few months will moderate in the short term. If anything, the expectation is for the situation 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 compound existing fragilities. These include years of low productivity growth, a growth model that is diminishing in effectiveness and has been further undermined in the last few years by disruptions to the trade relationship with the European Union, and significant inequalities among regions and along the income ladder.

The British economy is facing both immediate and longer-term challenges. Success in addressing them needs to be anchored by a medium-term vision centred on a new growth model that is designed for the changing structure of the economy, the need to counter the inequality trifecta — income, wealth and opportunity — and global secular changes related to technology, climate, population and health.

Without such a vision, there is an uncomfortable probability that a summer of discontent would aggravate secular headwinds to inclusive and sustainable growth that have long been in the making and have significant consequences.

Mohamed A. El-Erian is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE; and chair of Gramercy Fund Management. Source: Bloomberg