Tackling Tomorrow Today: ‘We have to deal with more than one crisis at a time’

Tackling Tomorrow Today
Tackling Tomorrow Today: ‘We have to deal with more than one crisis at a time’

The war in Ukraine is impacting economic growth and inflation across the world. Speaking at the first Tackling Tomorrow Today event of 2022, economist John Ashcroft explained what that would mean for the immediate future – and why the Chancellor’s Spring Statement has caused some confusion.

In December 2021, John Ashcroft delivered an optimistic verdict on economic recovery after another year of turmoil. At the time, the world had just been hit by the Omicron variant of Covid-19, causing financial markets to wobble, bruising confidence, and putting Christmas plans for many people in doubt. However, the overall outlook was improving from the shock of 2020.

Just three months later, the world is facing some very different threats and troubling uncertainties, only compounding the challenges it was recovering from: inflation, supply chain challenges, and weakened economic growth have returned, and there continue to be significant ripple effects from the war in Ukraine.

At Protiviti and Robert Half’s Tackling Tomorrow Today event, held on 24 March 2022, Ashcroft explained how the landscape has changed: Chancellor Rishi Sunak had just delivered his Spring Statement, the war in Ukraine was a month old, and discussion of the pandemic had given way to concerns over commodity prices and political stability.

“Like all of you here, I’m sure, our thoughts at Protiviti and Robert Half go out to everyone directly affected by the tragic events in Ukraine,” said Paul Middleton, managing director at Protiviti. “We all hope and pray for the conflict to come to an end as soon as possible.”

“We have seen the UK government’s response to some eyewatering economic figures: inflation is forecast to be 7.8 per cent this year; UK growth has been downgraded and interest on national debt repayments amounts to £83bn pounds a year,” he added. “Was the UK government’s response enough? Where are we heading? What do these world events mean for you, your family, and your business?”

Inflation hits growth, and interest rates are rising

The overall message from Ashcroft was ‘lower growth, higher inflation, and higher interest rates’. He listed a series of crises in the past two years: from the pandemic shock, the subsequent economic shock, the seismic shock of supply and demand in the middle of last year, and the inflation and monetary shocks that came afterwards. In a perfect storm of challenges, now we have the shock of war, he said.

In a video played during the event, Kristalina Georgieva, managing director at the International Monetary Fund, explained the impact. When Russia invaded Ukraine, she said, the world economy had yet to fully recover from the Covid crisis. “What we were striving for is for growth to go up and inflation to go down. Instead, we’ve got the exact opposite: growth is going down and inflation is going up.”

Together, Russia and Ukraine account for 30 per cent of the world’s wheat production and 15 per cent of corn, with doubts over this summer’s harvests. Commentators believe that we will see the impact of high food prices across the world. Families will have less money to spend, but, in some cases, this trend translates into real hunger and food insecurity. As Georgieva explained: “A war in Ukraine means hunger in Africa. My main message to the audience is that we have to deal with more than one crisis at one time.”

According to recent figures from the Organisation for Economic Co-operation and Development, the war in Ukraine will reduce economic growth in the Euro area by 1.4 per cent this year; in the US by 0.8 per cent; and in the world economy by just over 1 per cent. Inflation in Europe and across the world will increase by more than 2 per cent and in the US by 1.5 per cent – on top of the cost increases already expected.

Economic growth in the UK has also been revised down. This year, forecasts from Ashcroft predict GDP growth of 4 per cent, with 2.5 per cent in 2023 and 2 per cent for the following two years. According to the Consumer Price Index, inflation is tracking at 6.2 per cent in the first quarter of 2022 and will peak at 7.8 per cent in the three months to the end of June. While it will begin to fall, inflation is still expected to remain at 5 per cent in the first quarter of 2023.

Interest rates are expected to rise from their current position of 0.75 per cent, which equals their pre-pandemic level, towards 1.5 per cent by the end of this year. In 2023 and 2024, they will nudge upwards towards 2 per cent, reaching 2.5 per cent in 2025. Ashcroft’s longer-term forecast suggests they will reach 3.5 per cent in the years ahead.

Ask an economist

With rising costs, economic growth downgraded, inflation reaching record levels, and the cost of borrowing increasing, Ashcroft took questions from the audience about the big issues – and shared his thoughts on the Chancellor’s Spring Statement as well.

If you were sitting in front of a chief executive, what would you be advising them to focus on?

Revisit the basics of the business plan and strategy and focus on what they are trying to achieve. Inevitably, they will have to look at the implications of their debt and borrowing situation, and then do a scenario analysis of growth in the UK and around the world. The big issue we face is what’s going to happen to inflation and central bank monetary policy. The top five things on their ‘wall of worry’ will likely be growth, recruitment and retention, inflation, supply chains, and interest rates.

Do you think the surge in oil prices is going to accelerate the ESG agenda and the green economy?

If anything, saving the planet may have to wait because we’re looking at ways of bringing more fossil fuels on stream quickly. There’s a lot of pressure from governments to get the oil rigs pumping in the US and the gas coming in from the North Sea. The big challenge is weaning Europe off Russian gas. But if price levels persist, the push to alternative fuels should be easier and, generally, the trend has to continue.

Do you think we’ve reached a peak in commodity prices?

That’s the million-dollar question. We model oil quite a lot. Producers like high prices if they don’t lead to demand destruction. If we see that taking place, then they will pump more oil to bring the prices down. We also know there’s lots of capacity to bring on stream. The big shock is absorbing the Russian adjustment in the short term. But, yes, we do see it peaking. Commodity prices, too, look like spikes and I think will start reverting to the norm sometime towards the end of the year.

The recruitment market is “crazy”. What are your thoughts on wage inflation and how it could make the market more challenging?

In the US and the UK, we’ve seen growth figures for the economy downgraded, but we haven’t seen those adjustments in the labour market. The unemployment rate is still remarkably low and the participation rate in the UK is increasing as more people come back into the workforce. That should ease the level of vacancies from the highs of 1.3 million, with wage growth moderating about 4.5 per cent, and the disparity between vacancies and unemployment easing towards the side of recruitment.

But it’s a tough call: the central bank wants to avoid escalation in wages, because if we see that, then interest rates could go even higher. But there is a change in psychology in the jobs market, with bigger retention challenges than before.

Do you think that Chancellor Rishi Sunak did enough in the Spring Statement to drive the UK economy forward into 2023?

The headlines are not too good: the Institute for Fiscal Studies has been quite scathing. It focuses on welfare economics, and the impacts of the statement don’t read well for low- and middle-income groups.

To announce the National Insurance increase, and then make changes to tax allowances, is contradictory. Logically, it’s a good move to increase the benchmark on any rates, but it doesn’t read well among chief executives and analysts to throw in a tax cut at the same time corporation tax rates and insurance costs are rising.

In terms of the UK economy, we came into the year with pretty good momentum, which will be maintained, and household incomes are generally in good shape. We’ll see growth this year, but our next issue is coping with inflation. Helping businesses to maintain momentum is important, so a corporation tax cut would help.

On your ‘Ashcroft optimism barometer’, where are you compared to last year, and looking forward?

I am shocked and disheartened about what is happening in Ukraine. So, I want to see an end to that devastation, and quickly. But in terms of the world economy, yes, we’re reasonably positive: we look forward to seeing what happens with inflation, and with great relief, we’re leaving a world of negative interest rates and zero base-rates, back to the reality of real rate rises and positive bond yields.

Disruption is everywhere. Bold forward-thinking will continue to underpin future success, and must be combined with authentic and consistent action. For more information on Protiviti and Robert Half’s Tackling Tomorrow Today event, please click here.

Quarterly Economic Update with the Saturday Economist John Ashcroft

With ongoing economic uncertainty, the devastating impact of the Ukraine crisis, and tax and energy bills continuing to rise, the spring statement 2022 will be pivotal for households and jobs.

Watch on-demand as John Ashcroft, The Saturday Economist, helps us make sense of the Chancellor’s policies.