Will the UK economy be less miserable this year?

The most depressing day of the year is nearly upon us. Given that 15 January is dubbed ‘Blue Monday’, it seems only fitting to look at how miserable the UK’s economy really is. 

True to form, economists have a statistic for this: the Misery Index sums a country’s unemployment and inflation rates to provide a measure of economic adversity. For the UK, a ‘good’ Misery Index score would be about 6.5 per cent, summing at-target inflation at 2 per cent and ‘equilibrium’ unemployment at 4.5 per cent.

But as the chart shows, the economy has been significantly sadder than that recently. In the final quarter of 2022, the Misery Index hit 14.4, driven largely by an eye-wateringly high inflation rate. December’s Misery Index was 8.1 (3.9 per cent inflation, plus 4.2 per cent unemployment), and if the Bank of England’s forecasts are anything to go by, this should dip to 7.8 by the end of 2024. 

A downward trend isn’t the only significant development. A high Misery Index can be driven by unemployment (as it was after the financial crisis), the inflation rate (as we saw last year) or a nasty combination of both (see the early 1990s). It looks as though the composition of our index is going to shift next year: as inflation falls to around 3 per cent, the unemployment rate (at 4.7 per cent) will be making the greatest contribution to our economic gloom. The details might sound pedantic, but this distinction really matters. 

Economists have long argued that people’s levels of happiness are much more affected by movements in a country’s unemployment rate than its inflation rate. In 2001, economist Andrew Oswald and colleagues studied over a quarter of a million people and concluded that “jobs are nearly twice as important as low inflation”. As a result, they recommended that a ‘true’ Misery Index should put double the weight on unemployment.

Some economists propose further amendments to the benchmark to give a truer reflection of economic gloom. American academic Steve Hanke generates an annual index (known as the HAMI), which incorporates unemployment, inflation, bank lending rates and the annual percentage change in real gross domestic product (GDP) per capita. Last year saw Hanke double the weighting of the unemployment component for the first time, to reflect the outsized impact of joblessness on an economy’s sense of wellbeing. The table below shows a selection of countries and their HAMI rankings for 2022. 

Inflation dominated headlines in the UK, and (unsurprisingly) the data confirms that it was indeed the biggest driver of our misery. Given that inflation is set to recede this year, will things start to feel less despondent? 

Perhaps not. Plugging forecast data and market expectations for interest rates into Hanke’s augmented formula (see boxout below) suggests that the UK’s Misery Index figure will be 17 next year, only slightly better than 2022’s figure of 17.7. Stagnant growth and higher interest rates will take their toll, nullifying the impact of a lower inflation rate. 2024 should herald a return to far more ‘normal’ economic conditions. But if this index is anything to go by, we might not feel much better for it.