The Bank of England “kept calm and carried on” with no change in interest rate. Inflation was not considered as much of a concern as the fragile state of the recovery. Where does this fragility come from?
Let’s think of the British economy as being “in transition”. We can perhaps understand the fragility of the recovery and why the majority of the members of the monetary committee of the Bank of England collectively held their nerves and did not raise the interest rate. No matter how much they disappointed the City. The British economy is going through several transitions. Here are a few of them.
1) Skills, wages and planning. British businesses have complained about skill shortages for a long time. The recruitment processes seldom considered the possibility of training, upskilling or looking at candidates that did not fit the profile. The very large labour pool made available by the EU Freedom of Movement meant finding the skill set you wanted was always possible. The large labour pool meant no incentive to pay more money; talent was readily available somewhere. Now it is more complicated to import skills; therefore, you have to attract talent with money. Training and upskilling have also come back into fashion. The problem is that they require planning.
2) Rising prices. Rising costs and rising wages ultimately translates into rising prices. The rising cost of living and rising taxes make people less eager to spend all the money they allegedly saved during lockdown.
3) Transitioning out of lockdown. In the spring of 2020, many business sectors simply shut down or kept working at a minimum level. People working from home hollowed-out city centres and shut down the businesses that depended on their being around. Most people are beginning to realise that it takes time for things to pick up the pace they used to have. People have found other jobs and new ones need to be trained; the footfall is not what it used to be, but the infrastructure may not have half-measures. The economy is proving slow to catch speed, more like a steam engine than a formula one car.
4) Brexit and the significant changes it brought about. Brexit is a transition; Britain is a service economy, and services suffer from barriers. Despite all the bureaucracy, moving goods between the UK and Europe is far easier than arranging a musician tour covering more than one European country. Finding other markets for goods is not impossible, but it takes time. A musician that cannot tour is a cultural opportunity lost.
None of those transitions is insurmountable’; taken in isolation, they would present concern but not a huge one. Taken together and added to the uncertainties brought about by a pandemic that has not been overcome, they become the main reason why the British economy is still in a fragile state.