Many of us will be leaving 2022 with a sigh of relief. It’s been a grim year, one in which most of us have seen the real value of our earnings eaten up by inflation at a level unseen for decades. Sadly, all the signs point to the next 12 months being not only more of the same, but worse: high prices now join with global recession, further ecological upsets, and the threat of further financial crises.
Britain is uniquely stacked with institutions seemingly designed to generate the worst, most short-term and stupid solutions to any given economic problem – witness, for instance, a decade spent cutting the pay of nurses in response to the bankers’ financial crisis. As a result, we will suffer worse than most developed countries, while Europe as a whole is about to get much poorer.
One small relief is the weakness of our current Tory government, distracted by its own internal psychodramas. This weakness means it has not been able to commit to full-throttle austerity until 2024, just in time for the two-year recession the Bank of England forecasts to end, and also (by spooky coincidence) after a general election they are widely expected to lose. It will fall on Labour to oppose any return to spending cuts; sadly, with figures like the Strictly Come Dancing star and former chancellor Ed Balls urging the party to abandon its spending promises, there may be more of a fight over the issue than smart economics would suggest.
A further round of financial crisis in 2023 also cannot be ruled out. The Geneva-based Bank of International Settlements, often described as as the central banks’ central bank, issued a bloodcurdling warning in October over what it described as a $80tn “black hole” in the global financial system, made up of off-balance sheet liabilities belonging to financial institutions around the world.
This so-called shadow banking system has ballooned in recent years, as low interest rates have pushed those dealing with money into searching for more exotic ways to generate high financial returns. But as interest rates have crept up from the world-historic lows of the last decade, the various schemes and wheezes of the cheap money decade are getting exposed. When British pension funds were threatening to blow up in the wake of the disastrous Truss-Kwarteng mini-Budget, it was because they had also made use of complex combinations of financial derivatives to try and manage their liabilities in a world of low interest rates. Sudden rises in those rates destabilised the positions they had taken.
For Britain, the Bank of England’s most recent financial stability report says – perhaps complacently – that the protections put in place since 2008 are insulating Britain’s banks from further crises (protections, incidentally, that the government is busily seeking to rip up). But the Bank’s economists flag the wider economy: of rising prices cutting real incomes, causing – as we have seen with retail sales in the run up to Christmas – households to pull back on spending, and pushing us into a recession.
Inflation has probably peaked here and around the world in the last month or so. Global energy prices have been coming down since the summer. This is reducing the pressure on prices to rise in general, as the costs of crucial inputs to the economy, like natural gas, are not as high as they used to be. Fortunes have been made from inflation; rising prices paired with low wages resulted in record-breaking profits for energy giants like BP and Shell.
Yet inflation decreasing does not mean prices in general will be falling;, they will simply be rising less quickly. In other words, the big surge in prices over this year will not be reversed next year as inflation comes down. The losses to the value of the pounds you earn from high inflation will be permanent, lifetime losses unless income goes up to match. This is why it is so important to keep on demanding pay rises that at least match the rate of inflation, and ideally are somewhat higher than it. Lower inflation means you will be getting poorer more slowly than when inflation was higher – that is all. Further inflation surges can’t be ruled out either given the uncertainty introduced by geopolitics.
Most importantly, whatever the headline rate of inflation, food prices are still rising rapidly and are set to remain high for the foreseeable future. This is particularly ominous, since whilst energy price rises are mostly due to fairly short-term factors, like the aftershocks of Covid-19 lockdowns and Russia’s invasion of Ukraine, rising food prices have only been partly driven by these short-term issues. The disruption to world grain supplies – and subsequent financial speculation – has been significant, with Russia and Ukraine between them the world’s largest exporters. Russia is also a major supplier of fertilisers, disrupting harvests around the world into 2034. Surges in energy prices, meanwhile, have meant that energy-intensive crops (like greenhouse-grown British tomatoes) have been seriously affected.
But it’s the long-running problems that should alarm us. As the climate changes and ecosystems collapse, it is becoming harder and harder to grow and transport food. Coffee supplies have been battered by frost and drought in Brazil. British fruit and vegetable harvests were hit by extreme heat this summer. Next year’s global harvests are forecast to be worse than this year’s. This means higher food prices, a squeeze in Britain and famine across the poorer world.
Still, there are two reasons for optimism ahead of 2023. The first is that, after decades of quiescence, workers in Britain are becoming more organised and demanding fair treatment. There is a decent chance now, against this weak and inexperienced government, that the current round of strikes will generate some important wins, inspiring others in the new year. This matters, because instability is currently generating exceptional profits for a very few. Pay rises can claw some of those back, and protect against future instability (it’s easier to deal with sudden price rises if you’re already better paid).
Second, climate collapse is driving a new wave of activism around specific demands: to insulate leaky British homes properly and, globally, to build up international protections against biodiversity loss, as we’ve seen at COP15. There is the prospect next year of seeing a new generation of union activists line up with the movements in defence of our broken planet. We will need both: financially, next year will be worse than this one and if we can’t defend ourselves, no one will.