Are We Entering Another Winter Of Discontent?
Updated: Nov 15, 2021
Above expectation inflation, astronomical energy prices and shortages across the board have aroused a profound sense of uncertainty and unease in the UK. As we enter the winter, a post-pandemic economic squeak, rather than bang, has commentators harkening back to the Winter of Discontent. Upon scrutiny, the historical parallels aren't quite there, but the zeitgeist of the late 70s captures the general sense of the now evident economic malaise.
The Winter of Discontent was a period during the winter of 1978/79 marked by a historically cold winter, widespread economic turmoil and political discontent under James Callaghan's Labour government. At the time, trade unions represented a powerful political force and wielded enormous power through their ability to strike. At the peak of the movement, 70,000 workers in London alone went on strike. But what immortalised the period was the site of piled up bodies in January 1979, following a gravedigger and crematorium worker strike. The morbid site seized headlines and captured the national imagination. Underpinning this economic crisis was the spectre of stagflation; which some economists and commentators are now claiming has resurfaced.
Stagflation is defined as a period of persistent inflation and economic stagnation. A quick primer on these two concepts, the former refers to a rise in the general price level of goods and services in an economy whilst the latter is marked by little or no economic growth. At the heart of the issue is a paradox. Inflation can be a sign of economic growth and many central banks across advanced economies target inflation. But, during the stagflation crisis of the 1970s and our current moment, rising inflation can be identified in tandem with subdued levels of economic activity. The crucial distinction between the two periods lies in the source of inflationary pressure. Inflation ran amok during the 1970s due to strong trade unions and oil embargoes. The Thatcher government dealt with the former through structural overhaul in the labour market, and it is important to realise that the latter arose from a myriad of complex geo-political issues that ultimately proved temporary. As we explore the reasons for the current bout of inflation, the link being made between the winter of 1978/79 and the current stagflationary crisis become more clear. We must bear in mind that it may similarly be resulting from a mix of transiencial and structural problems.
The first issue under scrutiny is supply-chains, and no longer are they merely a dry topic in week 8 of International Trade. Following Brexit, they have become a focal point of mainstream news. The poster child of globalisation, supply chains have ushered in an era of unparalleled convenience for consumers across the Global North. Yet, many international supply chains crumbled in the face COVID-19, as the post-lockdown surge of demand fell unequally. Unravelling this further, pent-up demand can be traced back to stringent public-health measures put in place which dampened consumer spending but also inordinately directed it towards consumer goods. This collided with COVID related disruptions to new staff training and the "Pingdemic" – where contract tracing notifications forced workers to self-isolate. These factors and their overall effect on inflation might have been minimised had the furlough scheme not been so successful in propping up consumer spending through income replacement. With constant drives to increase vaccinations domestically and a renewed effort to increase global vaccine equity, there is hope that global supply chains become stronger, but the end remains far from sight.
Compounding pandemic-related supply-side issues is Brexit. Regrettably, the post Brexit labour shortages were not predicted by or factored into government planning or economic forecasting. Of course, it is worth noting that a shortage of lorry drivers and hauliers was an issue before Brexit. Though now, with even further reduced numbers and increased demand for their services, HGV drivers have been able to leverage their demand to secure higher wages. The hike in consumer prices caused by higher transportation costs has caused alarm for some, while others stress the importance for HGV drivers to be paid more in recognition of their essential role. Efforts are being made by the government to secure more drivers through offers of temporary visas, but numbers remain disappointingly low. As with the winter of 1978/79, structural changes to the labour market are required if current conditions are to be overcome.
Topping it off, a perfect storm of issues is causing UK energy prices to soar. Gas prices have gone up 250% since January with 13 energy suppliers having gone bust within the last two months - 2.4 million households have been affected by this crisis. The causes are manifold; a colder than anticipated 2020 winter, supply disruptions in Russian oil and gas, fractured Anglo-French transport links, poor conditions for wind farms in the UK and rising demand in Asia for cleaner sources of energy byereing. Given the multiplicity of causes from around the globe, it is difficult to describe this as a transitory issue and may instead represent a major structural stall in the British energy sector. The energy crisis is therefore one of the diverging points from the Winter of Discontent, wherein the energy crisis was temporary.
So, is it the same? There are certainly echoes of the past as wages and energy prices rise, albeit in specific sectors and in different ways. Fundamentally, the inflation of today is described as transitory. As vaccine distribution increases worldwide, building resilience to the virus in the human parts of the supply chain, and as backlogs are cleared at international ports, the economy can move closer back to equilibrium. It is important however, especially with regard to the energy crisis, that issues are properly evaluated in the context of being temporary or structural. The fear of inflation is expected to clear, and economic growth is expected to resume. But, when the finer details are scrutinised, such a development is far from certain. Instead, it seems the economic mood is ripe for a Winter of Discontent; plagued by stagflation.