Inflation is the least scary ‘bogeyman’ Britain faces
Szu Ping Chan
14 min read
Haldane was the Bank’s chief economist for more than 30 years, and one of its most outspoken voices - Geoff Pugh
Andy Haldane has opted for smart-casual today. It’s not the usual office ensemble though for the former chief economist of the Bank of England. Leaning back on a brown leather sofa, a starched white collar pokes out of his grey zipped hoodie in a combination that makes him look as ready for the gym as he is the boardroom.
Speaking to me from his holiday home on the Kent coast, he apologises for not being able to attend the interview in person. “Today’s very unusual for me because I go in every day typically,” Haldane says in a tinnier version of his Yorkshire accent.
Now chief executive of the Royal Society of Arts think tank, his office is roughly a mile west from Threadneedle Street, where Haldane became one of the first non-Oxbridge graduates to join the Bank of England’s trainee scheme in 1989.
A 32-year career saw him rise through the ranks to become its chief economist in 2014. He held that role until his departure in 2021, which was deemed premature by some who still bet he will return one day for the top job.
He’s had plenty of stimulating jobs since, including a short stint chairing the Government’s Levelling Up Taskforce. Haldane also sits on Jeremy Hunt’s council of economic advisors and agreed last year to lead Labour’s plan for “regional growth”.
All these roles have brought the UK’s challenges into sharp relief for Haldane, who worries about what he describes as a “pancake like” economy.
“It’s stuck. The economy’s stuck. In growth terms, it’s been treading water for at least a year. And looking ahead, if you believe the forecasts, it seems set to remain largely stuck for the months and quarters ahead.”
The outlook does indeed appear bleak, with the Chancellor forced to celebrate quarterly growth of 0.2pc in the three months to June. That may have been more than expected, but it still leaves the UK as the only economy in the G7 not to have recovered to its pre-pandemic size. The National Institute of Social and Economic Research (NIESR) doesn’t think it will reach this milestone until 2024. By comparison, the US economy is already 6.2pc larger.
For Haldane, the problems began well before Covid. “We have a conflation of growth being stuck at the macro level, and inflation remaining too high, and that’s an uncomfortable backcloth near term.
“But it comes against an even more uncomfortable backcloth of growth having been anaemic stretching back to the global financial crisis over the last 15 years and real pay largely unchanged over that period and unlikely to regain or surpass its global financial crisis heights for some while yet.
This collapse in real wages has been startling. Put another way, in May 2023, average total pay was £497 a week when measured in 2015 prices. That’s down 3.7pc in real terms from £516 in May 2008. The UK is now facing two lost decades of pay growth.
Haldane says that for younger workers this stagnation has not been seen since the 19th century, when handloom weavers who accounted for as much as 10pc of the male workforce were being replaced by machines, bringing down costs and wages dramatically in the process.
“We’ve seen stasis and in some cases retreat in the real pay of young people since the financial crisis, which means that this cohort, for the first time in 150 years, have seen real pay tracking below their parents on an age-like-for-like basis.”
Haldane, a father of three, is now worried that the societal progress that we’ve become used to for more than a century has come to a halt. Take the basic tenet that children should do better financially than their parents. For centuries, that perpetual progress was a given. But young people today are finding this is no longer the case. Haldane believes this has serious consequences.
“That insecurity in income is being compounded by insecurity about housing tenure, where we’ve seen rates of homeownership collapse for that cohort,” he says.
“For the Baby Boomers, by the age of 30, there was pretty much a 50:50 chance that they’d own their own home, which is probably a doubling of the ratio that their parents and grandparents would have faced in terms of patterns of homeownership.
“What we’ve seen for a 30-year-old today is that their probability of owning a home is about one in five. So there’s been a massive retreat. You have to go right back to the silent generation before the Second World War for similarly low levels of homeownership.”
The Millennial generation has become increasingly known as Generation Rent, or perhaps more accurately: generation-stay-at-home. The number of young adults living with their parents has grown from 2.4 million in 1999 to just over 3.4 million in 2022, with men far more likely to be living with their mums and dads into their thirties, according to the Office for National Statistics (ONS).
31pc of all men aged 20-34 are now living with their parents, compared with 26pc in 1999. Most of this increase has occurred since the financial crisis in 2007-08.
And therein lies the rub. “Financial insecurities have been compounded by housing insecurity which has been compounded by Covid,” says Haldane. “They have really sown the seeds of what I think are some of the mental health problems that young people are facing.”
Haldane says tackling these issues quickly should be a policy priority. “We’re under-investing significantly in the mental health of younger people. So much of the money in the National Health Service goes towards physical health among older people rather than mental health among younger people.”
He points out that we have seen rapid growth in the recent past. During the 2010s for example under former Chancellor George Osborne, the UK’s working-age employment rate rose from 70pc to 77pc, making up for relatively meagre growth in productivity over this period.
“There’s a huge opportunity here, and we know there is,” says Haldane. “Pre-Covid, we saw huge amounts of increased participation in the workforce, particularly by women, and by older people. So we know this is possible.”
The pandemic brought this trend to a sudden, screeching halt, with the number of people who gave up looking for work altogether rising by almost 650,000 at its peak. Today, working-age inactivity remains 350,000 above pre-pandemic levels.
Long-term sickness has been the biggest driver. The ONS had previously estimated that around 40,000 more people would become economically inactive between 2019 and 2022 because of long-term sickness as Britain’s population aged. The actual number was 462,000 – more than ten times that figure.
Haldane welcomes some of the measures taken by the Chancellor in the March Budget to stop people from leaving and drive more people back into the workforce. But more needs to be done, he believes.
“What we’ve seen in the light of Covid has some similarities to what we saw in the financial system in 2008-09, where underlying problems in a complex system are flipped into an unstable state by a big shock.
“During the financial crisis that was subprime mortgages. For the health system, it was Covid. And that is having knock-on consequences for workforce participation and for productivity that is having serious macroeconomic effects. In fact, it’s the first time in about 200 years that health issues are detracting from growth, rather than supporting growth in the workforce.”
This hit to growth is why Haldane says more also needs to be done to keep people aged over-50 in the workforce. Two thirds of the recent rise in inactivity has been driven by this age group, some through early retirement, others through ill health.
Haldane says he’s taken a closer look at the 1.034 million unfilled vacancies currently in the UK. Jobs in the property and mining sector have seen the fastest growth since the start of this year.
“I’ve asked myself: how many of these vacancies will be suitable for someone who is over 50 and 55? Over 60 even? And the answer is not very many. The problem is our jobs market, our companies have not flexed their job offering sufficiently to meet the needs of those of those older cohorts.”
In addition, politicians and companies need to move towards “a different sort of social contract between employers and employees for workers of that age group”.
While he praises the Chancellor for some of the steps he took in the Budget, Haldane adds: “It takes two to tango. You also need the right sorts of jobs for that age cohort to exist and by that I mean jobs that can work flexibly, jobs that have the requisite amount of training. So if you’re over 50 and perhaps your digital skills aren’t quite at the frontier, you need a smooth passage back into work.”
“I think ageism is one of the few remaining acceptable forms of discrimination in the workplace. It’s terrible for individuals, and it’s terrible for businesses which are chronically short of staff and skills right now.”
Some companies recognise this. Phoenix Group – one of the UK’s largest savings and retirement businesses – has banned words such as “energetic” and “enthusiastic” in job adverts to avoid deterring older applicants. Keeping this age group in a job potentially offers some of the biggest rewards for the economy.
“If these people remain healthy and stay in the jobs market, the prize here is really large. We’re talking about keeping people in the workforce who are experienced, people who have acquired expertise to keep them in the jobs market. That’s great for them, but also great for the economy. And right now, we’re not doing that.”
He adds with a smile: “That quality of work and respect at work is crucial for those slightly more experienced, slightly more senior members of staff – a bit like myself actually.”
Haldane took part in 68 interest rate decisions as the Bank’s chief economist - Sarah Lee/Eyevine
The son of a stay-at-home mother and a professional trumpet player who toured seaside towns, Haldane was born on a Sunderland council estate but grew up in Guiseley, a suburb of Leeds. His path to Threadneedle Street was shaped by his experience growing up in the 1980s, with three million unemployed – a factor he has previously cited as one of the main reasons he studied economics – first at Sheffield and then Warwick University.
Haldane was always a trailblazer, even in his early days at the Bank. He set up a new international financial stability division where he quickly found himself leading the internal response to Russia’s debt default in 1998.
He was also the first person to deliver a presentation to the founding members of the Monetary Policy Committee (MPC) after it was granted operational independence by Gordon Brown in 1997. Bank staff were asked to provide committee members with a whistle-stop tour of the economy in the run-up to the interest rate decision in a process that has not changed much to this day.
Tasked with the maiden presentation, Haldane has previously admitted he was a “bag of nerves” as he addressed a smoke-filled room as three policymakers – including then governor, Lord Eddie George – lit up to watch this fledgling analyst talk about the health of the UK economy. He pressed a button on his computer hoping it would kick-off proceedings only to find it tripped the whole system, leaving the audience viewing a room of blank screens.
Eventually, he found his stride, becoming so comfortable in fact that he ended up on the opposite side of the table, taking part in 68 interest rate decisions as the Bank’s chief economist.
In his final meetings however, he warned that the Bank was printing too much money and not guarding against inflation enough. He was outvoted. But he was right. And having been early to spot signs that inflation was on the up, today he believes the Bank is on the brink of tipping the economy into an unnecessary recession.
“Given that growth starts around zero, it wouldn’t take very much to throw this economy into recession right now,” he says. “I would remain hopeful that it can be avoided. But if it were to come to pass, if that squeeze on households were to be significant, I think it’d be difficult to avoid the conclusion that that was a policy induced recession.
“That has not been true of previous shocks. That wasn’t true of the cost of living shock, which very largely was an external shock. It wasn’t true of the Covid shock, which was an external shock. It wasn’t true of the global financial crisis, because that was an external shock. This would be distinctive in that the recession would have been induced, manufactured by policy.”
Interest rates are currently at 5.25pc and could rise further depending on this week’s wage numbers, which Andrew Bailey has heavily hinted will decide the Old Lady’s next move.
Inflation stood at 7.9pc in June, but is expected to have dropped to 6.7pc in July, though still well above other G7 nations.
But Haldane believes inflation will no longer be the “number one bogeyman” by the turn of the year, and is urging policymakers to pause for thought.
Haldane says he’s happy with the Bank taking “three years, maybe even four years to get inflation back down to 2pc in a way that doesn’t risk losing too many jobs or losing too much output or inducing that recession we’ve been talking about”.
He defends this approach. “That’s the way the inflation targeting framework – and I was there at the get go when it was being designed – was put together for situations like these,” he insists. “You don’t try and get [back down to 2pc] helter skelter on the conventional horizon – let’s call it 18 months to two years – you give it some more room, you extend the duration.
“For me the risk of letting the inflationary cat out the bag in a way that jeopardises the 2pc inflation target is a lesser risk than that of causing too hefty a crunch in the economy.”
Looking further ahead, Haldane remains passionate about levelling up, devolution and more investment in the economy. He also suggests that Hunt must do everything he can to make permanent a tax break for businesses that allows every pound invested in IT equipment, plant or machinery to be deducted in full from taxable profits.
Labour appears to be listening. It has suggested it will adopt a “net worth” fiscal rule that would take a snapshot of the government’s whole balance sheet – akin to the way a company reports its accounts.
And what about the biggest risk to the economy? After a long pause, Haldane says he believes the biggest risk is policymakers and the wider public just accepting that this lacklustre past he’s described has already written Britain’s economic future.
Expectations that this world will persist “can easily breed a sort of fatalism about the future that we are somehow consigned to our fate. I don’t think that is true. We can be the master of our own destiny. There are huge amounts of latent energy in the UK economy and local communities. I’ve spent many years travelling around hunting it down, it is there”.
