Britain’s economy is running out of places to look for good news as its economy continues to grapple with inflation while its European neighbors leave rising prices in the rearview mirror. This is now likely to have an impact on the country’s growth prospects.
The Organization for Economic Co-operation and Development (OECD) released its latest forecasts for developed countries on Thursday, and they did not make pleasant reading for the UK.
The country is one of the few countries to see its growth prospects downgraded by the organization, which is now expected to show growth of 0.4% instead of 0.7% previously.
While its economy is still expected to grow faster than Germany’s, which is expected to grow just 0.2% this year, the UK is still losing ground to the Eurozone, which collectively forecasts growth of 0.7% in 2024.
It’s the latest troubling data for the U.K., which is struggling to shake off high inflation and still feeling the effects of a tarnished reputation from the 2022 budget crisis.
According to Jens Eisenschmidt, Morgan Stanley’s chief economist for Europe, this has at least led analysts to find a simple way to sum up the struggling nation.
“Think of Europe, but everything is a bit worse,” is how Eisenschmidt describes the UK’s current economic situation.
It’s a feeling that is confirmed in the latest OECD outlook and that puts the country’s political decision-makers on the ropes.
The UK’s central bank, the Bank of England, is expected to be slower than the European Central Bank (ECB) in introducing interest rate cuts to boost growth, says Eisenschmidt.
The UK suffers from higher inflation than its European peers. Prices rose 2.4% in the eurozone in April, while in March the UK CPI rate was 3.4%, putting the former on a faster path to declines interest rate.
Eisenschmidt said the source of this higher inflation was up for debate. However, the blame could be placed on the UK’s growing unemployment crisis.
Economic inactivity has soared in the country, accelerated by a growing trend of long-term illness and youth unemployment.
The country has not been able to benefit from migratory flows to compensate for a tight labor market, unlike the European Union’s common market.
As a small open economy, the UK has also been more vulnerable than the EU to capital flight following market shocks, as summarized in the September 2022 Monetary Effect Budget.
Eisenschmidt said these pressures left the UK “more exposed to the need for domestic discipline” in the short term.
The outcome of this year’s UK general election, the date of which is not yet known, is another major short-term variable impacting the fortunes of the economy.
Aging populations
The UK is expected to get used to a trend where labor market flows have an outsized impact on economic performance.
Eisenschmidt said developed European countries share a common threat from their aging populations. As demographics age, developed economies are expected to face labor shortages, compounded by the need for workers to care for older citizens.
As Eisenschmidt points out, countries will increasingly rely on immigration from younger countries to fill gaps in the labor market.
However, in recent years the United Kingdom has acquired a reputation for being inward-looking. The country voted to leave the European Union in 2016 during a debate that focused heavily on immigration levels from other EU countries.
Domestically, the government’s controversial plan to deport asylum seekers to Rwanda has been a controversial issue in recent months.
Despite this, total immigration to the UK has increased steadily since the UK’s Brexit vote. Net migration, however, declined as more people left the country after the vote.
However, despite its own attitude towards immigration, the UK appears to be one of the best places for foreign residents.
“A key measure of long-term success or less relative decline is your ability to attract migrants and integrate them into the workforce.
“I would say that, from my point of view, the UK doesn’t do too badly, simply because of its language and its excellent educational establishments which have great brand value externally.”
