Labour shortage will hit economy hard in next 5-6 years says economist

The biggest constraint on growth in the UK is a labour shortage, a behavioural economist has warned.

Britain has lost 1.3m EU workers since Brexit, Roger Martin-Fagg said. There are 1.8m fewer 15-24-year-olds, and 200,000 55-to 60-year-olds have taken early retirement. Labour supply has fallen by 3.3m, he said. Health and social care, hospitality, scientific and technical sectors have the largest number of vacancies.

Martin-Fagg suggested Britain has full employment despite the current 1.5m unemployed. He said a “big slab” of the jobless are unlikely to be a good match for vacant posts because of wrong location, skillset and possibly attitude. Speaking to Elite Leaders, recruitment membership and networking organisation, Martin-Fagg said fewer young people coming into the job market meant labour supply problems will persist.

He predicted significant wage inflation as companies poach from each other, telling his online audience: “You will be instrumental in the poaching game; that isn’t a criticism – it’s inevitable.”

Looking ahead to 2022, Martin-Fagg expects average wage growth of 6%, an inflation rate of 4-5%, real growth (GDP) of 3% and interest rates to rise to 2% by the end of the year. He dismissed forecasts of stagflation (weak economic growth and high inflation and high unemployment) as wide of the mark.

The behaviour economist said central bankers’ hopes that current inflation is a “blip” are wrong. He said $17tn (£12.7tn) of new money had been created by central banks globally in Covid support. “There is no way supply can rise fast enough to match this, so inflation is not a blip but will remain in the system until purchasing power is eroded and demand slows to match supply,” Martin-Fagg said.

The inflationary boom will continue for at least another two years, he said. The first signs of recession could appear in 2025/26, Martin-Fagg said, but he suspects it will be 2027/28.

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