Britain’s economy is a cautionary tale for the US and Europe

  • There is talk of stagflation in the United States, but it is the British economy that should soon stagnate.
  • Britain is already facing the highest rate of inflation in the G7 – and it is expected to climb even higher.
  • Soaring energy prices, rising interest rates, tax hikes and Brexit are hitting the UK economy.

Talk of “stagflation” – the dreaded combination of stagnant growth and runaway inflation – is growing louder in the United States after the economy contracted for two straight quarters.

Of course, inflation is hot and the economy is dangerously close to a recession. Yet many still expect the next two years to deliver relatively strong growth, and this after a rapid rebound from the coronavirus crisis.

Over the pond in the UK, however, things are different. Economists say Britain is heading for a period of stagflation, with growth set to slow to a slowdown next year.

UK inflation hit a new 40-year high of 9.4% in June as fuel prices jumped, official data showed. That’s higher than any other G7 country – Canada, France, Germany, Italy, Japan and the United States. It is likely to exceed double digits before the end of the year.

Soaring prices, rising interest rates, tax hikes and Brexit are all hitting the UK economy at the same time. The country’s gross domestic product will grow just 0.7% next year, the worst performance in the G7, private sector economists polled by Bloomberg predict.

The Bank of England is even more pessimistic. He thinks GDP is expected to decline slightly in 2023 and only grow by 0.25% the following year.

Meanwhile, economists expect the US economy – which has fared much better during COVID – to grow 1.3% in 2023. And they think eurozone GDP will grow by the same amount. amount.

UK leaders are under pressure

For policymakers in the United States and Europe’s best-performing economies, Britain holds a warning of what could happen if things go wrong.

Britain’s leaders are coming under increasing pressure over the bleak outlook. Railway workers, lawyers and postmen are on strike as the cost of living soars. Consumer confidence has plunged.

In fiery televised debates this month, potential successors to Boris Johnson as British Prime Minister inadvertently trashed the government’s economic record.

“All your bills, every month, they’re going up more and more,” said Rishi Sunak, who has led Britain’s economy ministry for the past three years. The other candidate, Foreign Secretary Liz Truss, said the UK was facing “the worst economic crisis for a generation”.

Energy bills are skyrocketing

At the heart of the UK’s woes is an inflation rate that exceeds that of other wealthy countries and is expected to continue to rise this year.

The country’s energy price cap, designed to ease the burden on utility bill payers, is now adding to the pain.

The cap jumped 54% in April and is expected to rise by a similar amount in October to reflect a spike in oil and gas prices driven by Russia’s invasion of Ukraine.

“Energy prices are going up and staying there longer, rather than going down with the market,” Sanjay Raja, chief UK economist at Deutsche Bank, told Insider.

A sharp fall in the pound has made matters worse, Raja said. It has fallen about 11% this year against the dollar as the Federal Reserve’s rate hikes sucked money out of the United States. The UK imports much of its food and energy, and a weaker pound makes such purchases even more expensive.

The workforce has decreased

As well as a European-style energy shock, the UK is suffering from a problem more familiar to the US: a labor shortage. More than 400,000 people have left the labor market since the start of the pandemic, economists estimate, about half of them because of long-term illnesses.

Firms are raising wages as they compete for a smaller pool of workers, adding to pressure on prices, according to Ruth Gregory, senior UK economist at consultancy Capital Economics.

“You have these acute labor shortages, which have dampened activity in some service sectors, fueling rising wages and rising inflation,” she told Insider.

Brexit has also reduced the size of Britain’s workforce by making it more difficult for people to move into the country, Gregory said.

Brexit and tax hikes don’t help

Deutsche Bank’s Raja said Brexit was also causing other problems.

“Companies tell us [about] additional paperwork, logistical costs and, in some cases, higher tariffs due to exiting the European single market,” he said. “These things have also pushed up the prices of imported goods.

Tax hikes, which took effect in April in a bid to reduce the budget deficit, are also adding to the pressure.

“As far as I know, we are the only advanced economy to have imposed a tax hike this year amid the cost of living crisis,” Raja said.

This is nightmarish stuff for the Bank of England, which is raising interest rates sharply and seems resigned to a sharp slowdown in growth. “Its path to a soft landing is narrower than the Fed’s,” Gregory said.

But it’s even worse for millions of Britons struggling to get by during the worst cost of living crisis in a generation.

In real terms, wages are falling sharply. More and more people are turning to food banks and worker discontent is growing. Whoever succeeds Boris Johnson faces an arduous task.

Mary I. Bruner