- By Lucy Hooker
- Business Reporter, ` News
7 minutes ago
image source, Getty Images
The UK economy is struggling – and people are feeling it in their pockets as wages fail to keep up with soaring prices.
The International Monetary Fund (IMF) forecasts that the UK economy will contract this year while all other major economies grow.
The Bank of England is also forecasting a recession in Great Britain for 2023 – albeit one that will be shorter and less severe than previously forecast.
Perhaps unsurprisingly, given the pandemic, the war in Ukraine, and rising energy and food costs, the outlook is bleak.
But why does Britain seem to be doing worse than other rich countries like the US, Germany and France?
Is the UK really lagging behind?
Forecasts are never perfect. There are so many factors influencing economic growth – from geopolitics to the weather – that forecasts are bound to be misleading. But they can point in the right direction.
And the evidence shows that other countries have been less affected than Britain by the tremendous challenges of recent years.
Figures from the Organization for Economic Co-operation and Development (OECD), which looks at how rich countries are doing, show the UK economy contracted more than others in the early months of the pandemic.
The UK’s pace of recovery has been fast after the economy reopened – but not fast enough to regain lost ground.
But the difference between the UK and other countries may not be as great as it seems.
That’s because most countries measure the output of their public services, such as health and education, in terms of costs – nurses’ salaries, for example. In the UK, they are accounted for differently by assessing the services rendered, such as hospital surgeries.
As a result, UK figures better reflect the impact of closed schools and canceled surgeries during Covid, as well as disruption due to strikes.
However, the bigger picture remains: both the Bank of England and the IMF expect the UK economy to contract this year, while other G7 countries are expected to grow.
Some observers, including independent economist Julian Jessop, believe the IMF was overly gloomy about the UK’s outlook and that the differences discussed – a percentage point here or there – are small.
Nonetheless, he says there is definitely “something to explain” about Britain’s slowing economic performance.
Is everything due to Brexit?
Estimates of the cost of Brexit vary – according to a Bloomberg report it will cost the UK economy around £100bn.
“The EU is a very rich part of the world,” says Carl Emmerson, deputy director of the Institute for Fiscal Studies, an independent think tank. “And we’ve decided to make trading with this group of countries, for better or for worse, much more difficult, so clearly it’s going to be something that makes it harder for the UK economy to grow.”
EU workers used to come voluntarily to work in the UK but can no longer do so, making it difficult for the hospitality, farming and care sectors to find enough staff.
Even Julian Jessop, who describes himself as a “Brexit optimist” and believes in big potential gains from leaving the EU, says there have been short-term economic costs.
“We’re still in a kind of transition phase in which the negative dominates,” he says.
But he says these negatives “are smaller than people argue” and “are more temporary because many of them have to do with insecurity and the adjustment process.”
What else influences the economy?
Russia’s invasion of Ukraine sent global energy prices skyrocketing – but the impact varies from country to country.
The US has its own domestic sources of fossil fuels and some European countries have more alternative energy sources, says Mr Emmerson. France, for example, has a large nuclear network and Norway has significant hydroelectric power.
“Britain is quite exposed,” he says.
In addition, electricity pricing in the UK is based on the cost of gas, the most expensive form of electricity generation. That has pushed up bills across the economy and exacerbated inflation, says Mr Jessop.
In most economies, the workforce shrank during the pandemic.
But here, too, the UK is an outlier, with numbers not recovering after the crisis.
Economists are still trying to figure out why. It seems that it’s not just because there are fewer workers in the EU.
Young people have chosen to study rather than work, older people have taken early retirement and more people are on long-term sick pay.
There are signs that the workforce is starting to grow again, which could help boost growth and tax revenues later this year.
long-term problems
There are also more fundamental reasons for the UK’s underperforming, says Cambridge University economist Diane Coyle.
While the economy has slowed since the 2008 financial crisis, the roots of the problems go back much further, she argues, as investment has slumped since the 1990s.
This left the economy lacking the resilience to weather the triple shocks of Covid, Brexit and the war in Ukraine.
“It’s because of long-term weaknesses, long-term underinvestment in the private and public sectors, [and] Deteriorating public services and infrastructure that are simply essential for the economy to grow,” she says.
For its part, the government says the UK economy is resilient.
Responding to figures showing the UK narrowly avoided a recession in 2022, Chancellor Jeremy Hunt said the figures show “underlying resilience” – but added the country was “not out of the woods”.
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