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Britain’s workforce to shrink permanently in wake of pandemic, says Bank of England

Recession will not be as bad as feared, says Bank of England interest rate 4pc rise - Frank Augstein/AP
Recession will not be as bad as feared, says Bank of England interest rate 4pc rise - Frank Augstein/AP

Britain’s workforce will be permanently smaller after the pandemic, the Bank of England has warned, putting the economy on a path of stagnation.

Bank officials cast doubt over the Government's ability to drive hundreds of thousands of people back to work, highlighting evidence of "increasing detachment" among people who had left their jobs or given up looking for work since 2020.

Increasing numbers of Baby Boomers reaching retirement age meant the number of Britons in the workforce was already "trending down", the Bank said.

Many early retirees were now also "unlikely to return" to the jobs market soon because they do not want to work.

Jeremy Hunt, the Chancellor, is under pressure to do more to provide incentives to work in the forthcoming Budget, with Britons currently facing the highest tax burden in 70 years.

The Bank said these factors would damage the UK economy's long-term economic performance, as it sharply downgraded its views of UK potential supply growth – which determines how much the economy can grow before is starts to overheat – to just 0.7pc over the next couple of years, from a pre-crisis average of more than 2.5pc.

Torsten Bell, chief executive of the Resolution Foundation, says the outlook puts Britain on a path to "perma-stagnation" and at risk of "a prolonged, and far deeper living standards downturn".

However, the Bank upgraded its near-term growth forecasts and said the UK avoided falling into recession at the end of last year.

Policymakers raised interest rates from 3.5pc to 4pc and signalled they were nearing a peak.

Thursday's rate rise will add nearly £50 per month to the average monthly tracker mortgage payment.

The Bank also said an estimated 1.7 million mortgages will reach the end of their fixed-rate term this 2023, with these households facing an average monthly increase of £250 when their current deal ends.

Higher interest rates are expected to boost returns for savers, though the average instant access account still pays just 1.73pc, according to Moneyfacts.

Andrew Bailey, the Bank's Governor, said that while it was too soon to "declare victory" over inflation after ten successive rate rises, falling energy costs would help to lower inflation dramatically over the next year from a current rate of 10.5pc to around 4pc at the end of 2023. This would meet a goal set by Prime Minister Rishi Sunak to halve inflation this year.

Policymakers now predict a shorter and shallower recession than previously forecast, with the economy expected to eke out growth of 0.1pc in the final three months of 2022, compared with a previous prediction for a slight fall.

More than half a million people have left the workforce since the start of the pandemic. Mr Bailey said that while official figures suggested many of these people were not looking for a job because of ill health, a decision to take early retirement probably played a bigger role.

He said that while it was "too early" to judge the long-term impact on the economy, nursing these people back to full health was unlikely to encourage them back to work, with the last of the Baby Boomers also due to retire this decade.

“The population is ageing, that would have happened irrespective of Covid," he said.

The Bank's latest Monetary Policy Report expects shifts during the pandemic to continue to weigh on the economy in three years time. "Covid and associated delays in treatment for other conditions are likely to have played a significant role," the Bank said, adding fewer people had returned to the workforce than they expected.

"This may point to the decline in participation persisting for longer than previously estimated," it added, with "little sign of people returning to the labour market due to cost of living concerns.”

MPs said they were confident the Government could get more parts of Britain working again. Former Tory leader Sir Iain Duncan-Smith said: "I don't think the Bank understands what is happening in the labour market.

"People aren't coming back because too often there isn't the incentive for them to come back, because the Government takes so much in tax, and also businesses are burdened with too much regulation.

"The British public are being hit by high inflation, high interest rates, high taxes and far too tight regulation. We need to ease regulation to make Britain more competitive."

The Bank now sees Britain facing a shallower recession than the one suffered during the 1990s, with five straight quarters of falling output that will leave the economy 1pc smaller over the next year. Officials said the Government’s energy price cap would help to "limit the squeeze" on household spending.

Staff shortages mean companies are more likely to keep workers on their payrolls than previously expected – with around 400,000 fewer people now forecast to lose their jobs during the downturn.

Bosses were likely to "reduce staff hours or shifts, before actively reducing headcount", the Bank predicted. The tight jobs market had also pushed up average annual pay rise expectations to around 6pc, the Bank said.

Bank officials stated that further rate increases would be dependent on how many people continued to demand big pay rises, and how that fed into price increases. They said further tightening would be required if "there were to be evidence of more persistent pressures".

Tory MPs also urged Mr Hunt not to put up the state pension age to try to keep more people in work, saying many were increasingly worried they would never receive it.

The Telegraph reported in November that the Chancellor was considering bringing forward the year at which the state pension increases to 68 from 2039 to the mid-2030s.

In the debate on Monday night, Conservative MP Nigel Mills said that it is right that if life expectancy increases, "you have to find a way of paying for that" – but said the "data does not now show, sadly, life expectancy increasing".

Natalie Elphicke, the Tory MP for Dover, said: "For a person of my age, the statutory pension is like one of those Scottish mountains.

"It is an optical illusion: as we get ever closer, it seems that there is just that bit further to go. When I started my working life, my pension age was 60.

"When it was changed in 2010, I was already roughly two thirds of the way through my expected working life. Should the pension age be raised to 68, a woman of my age, at current rates, will have lost out on the equivalent of between £59,000 and £77,000."

She argued that if the pension age is to be extended, "then the law needs to be changed" as "age discrimination is like any other discrimination".