Market Pulse
Monday, February 6, 2023
The UK economy is facing dire straits. The International Monetary Fund recently released their economic growth forecasts for G-7 countries. In it, they relegated the UK to the economic doghouse. The UK economy is the only G-7 economy expected to decline in 2023. Even Russia is expected to do better[1].
UK household spending is being weighed down by high energy costs, rising mortgage costs and higher taxes. The Bank of England has hiked interest rates 10 times since the pandemic and they expect more than 4 million people will face higher mortgage bills over the next 12 months[2].
It’s not just the UK consumer that is struggling. As pandemic support was scaled back, more UK businesses went bust in 2022 than in any year since the global financial crisis. The construction, hospitality and retail sectors have been particularly hard hit. Things probably won’t get any easier after this coming April when the government is expected to reduce the level of energy support[3].
It’s not just 2023 that will be a difficult year according to the IMF. They say that in 2024 the UK will still be near the bottom of the growth pile alongside Japan and Italy[4]. So why is the UK economy expected to perform so poorly?
One reason is inflation. As mentioned earlier, households are facing an acute cost of living crisis. But there are some early signs that inflation might have peaked, so the cost of living crisis should hopefully start to ease off soon.
Other, less temporary, reasons for weak economic growth in the UK include low productivity and weak business investment. These might prove more difficult to solve. UK productivity growth has languished since the global financial crisis. Between 2010 and 2019 it grew at 0.6% per year, well below the 2% average it grew at between 1990 and 2007[5].
Another reason is weak business investment. If businesses don’t invest, the economy will struggle to grow over the long-term. Business investment was strong until 2016. In the aftermath of the Brexit vote business investment slowed down dramatically and has yet to stage any sort of recovery[6].
To make matters worse, UK debt is ballooning. The UK has spent billions of pounds supporting businesses and households with their energy bills. And thanks to high and rising interest rates they have had to pay billions more to service outstanding debt[7].
The road to recovery for the UK economy will likely be a long and bumpy one. But despite the somewhat gloomy economic outlook from the IMF, investors appear to be more upbeat. The FTSE 100 recently reached an all time high thanks to strong performance from the Financials, Materials and Energy sectors[8].
[1] https://www.bbc.co.uk/news/business-64452995
[2] https://uk.news.yahoo.com/bank-of-england-4-million-mortgages-to-rise-next-year-115104210.html
[3] https://www.ft.com/content/8e5b8f8b-a061-4880-acda-cfb53dfbbd3e
[4] https://www.bbc.co.uk/news/business-64452995
[5] https://www.ft.com/content/e7a8cb3a-efcc-4d62-962b-d284545c14f6
[8] https://news.sky.com/story/ftse-100-reaches-highest-ever-score-12802279
