SURF is an active member of the SCDI network
This month, SURF attended an SCDI event on ‘Economic Prospects for 2023’, featuring Katerina Lisenkova, Senior Economist and Climate Lead with the Royal Bank of Scotland. For the general interest of the SURF network, a short summary follows.
Katerina’s data-rich presentation highlighted indicators and forecasts in a range of areas, from wholesale gas import prices and household mortgage spending levels, to information on inflation, carbon emissions and retail.
The central point is: we are living through “a record-breaking reduction in living standards” in the UK. The negative impact will be progressive, having continual impact through to at least 2028, with the lowest income deciles suffering the most in terms of proportionate fall in real income.
This will add pressure throughout the economy, and is already having a negative impact on households in all income groups, with more pain to come in e.g. higher mortgage payments as existing deals are renewed. Economists are pessimistic about making assumptions that we are living through a short shock with a quick recovery. The data currently points to a prolonged reduction in living standards.
On net zero ambitions, Katerina said there is a huge gap between pledges, targets and outcomes, and many forecasts are assuming these gaps will narrow towards 2030. These predictions have some grounding in reality, but this is still a hypothesis that needs to be evidenced in practice.
A productivity slump is particularly damaging to the UK. In 2007, UK median household income levels, measured through purchasing power parity, were broadly in line with Denmark, Ireland, France and Netherlands – now significantly behind. UK’s “productivity puzzle” is not close to being solved or addressed, there are too many causes, and some of these are poorly understood. The Office of Budget Responsibility, the Bank of England, the Scottish Fiscal Commission and others tend to assume productivity growth in their models, but some expert economists are sceptical that we will emerge from the present slump soon, and Katerina said some institutions are making “strong assumptions”.
Following the presentation, much of the Question & Answer exchanges focused on shocks. Can we predict how frequently these shocks are appearing, and how damaging they are? Katerina said, fundamentally, no: shocks are by nature unexpected, and economists are concerned with the underlying functioning of the economy – living standards, growth, productivity, inflation etc. – which will return to normal as shocks recede or are dealt with. Economists are there to react to shocks and help navigate them, but have poor record on predictions, see e.g. “post-Covid roaring twenties” forecasts, or inflation level predictions for 2022, which were highly inaccurate.
Two grand questions emerged: Are there grounds to argue we should stop thinking about economic growth altogether and focus attention on sustaining adequate living standards for the poorest households hardest hit by present crises, and prioritising support for climate change? If Covid was treated as the big priority emergency, should we be doing the same for the climate now? Katerina said the climate should be at the front of policy-makers’ minds.
Finally, it was noted that demographic shifts will add further to economic challenges over the next decade. The general functioning of the economy is, of course, a key driver of regeneration and degeneration in Scottish places. SURF will continue to track and explore developments around macroeconomic trends in our activities and outputs.
