Why Is The UK's Economy Set To Do So Much Worse Than Its Competitors?

The UK’s near economic future is not looking too good, according to the latest forecasts.

In fact, it’s looking significantly worse than other developed countries – including Russia – according to the International Monetary Fund (IMF), 

The organisation, with 190 member countries, works to stabilise economic growth around the world.

And, out of all the developed economies in the world, the IMF now thinks the UK will be the only country to shrink next year.

Here’s why.

So what’s happened to the UK economy?

Figures released this week by the IMF showed that the Eurozone grew by 3.5% in 2022 and the EU expanded by 3.6% in total.

It also predicted that the US would enjoy 1.4% economic growth, 0.1% in Germany and 0.7% in France.

Russia, too, is expected to grow by 0.3% even though it is facing ongoing war costs, intense sanctions from other Ukrainian allies and a shrinking workforce.

The UK, meanwhile, was expected to shrink by 0.6% in 2023.

This is a bit of shock compared to the last forecast from IMF, back in October, which predicted the UK economy would grow (ever so slightly) by 0.3% – meaning it would have pretty average growth compared to other industrialised economies.

However, this did not factor in Liz Truss’s disastrous mini-budget.

Although most of the measures she introduced have since been overturned by her successor Rishi Sunak and chancellor Jeremy Hunt, there are still lingering effects.

This means the IMF downgraded predictions for the UK, while most other countries saw an upgrade.

The UK is therefore the only country with a recession forecast (two quarters of negative economic growth).

It’s also worth noting that last year, the IMF told the BBC that the UK had “one of the strongest growth numbers in Europe” after it expanded by 4.1%.

The UK is actually the only G7 economy not to recover fully (and instead, shrink) after the pandemic, weighed down by high energy and food costs with inflation at a 40-year high, complete with widespread strikes from public sector workers.

And that’s just the most recent forecast. 

The Confederation of British Industry also revealed back in November the UK recession could become a “lost decade”.

The CBI director general Tony Danker said: “Britain is in stagflation – with rocketing inflation, negative growth, falling productivity and business investment.

“Firms see potential growth opportunities but a lack of ‘reasons to believe’ in the face of headwinds are causing them to pause investing in 2023.”

He added: “We will see a lost decade of growth if action isn’t taken. GDP is a simple multiplier of two factors: people and their productivity. But we don’t have people we need, nor the productivity.”

What are the main factors behind this economic crunch?

High energy prices prices

The UK still uses expensive liquid natural gas to heat our homes, meaning it is vulnerable to the very high gas prices triggered by the Ukraine war.

This is worsened by Sunak’s restriction of public investment at a time (including a windfall tax on some of the largest energy firms) when the rest of the world is looking to strengthen green energy.

Rising mortgage costs

High interest rates from the Bank of England means the cost of borrowing has skyrocketed – particularly for those with mortgages.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, told The Guardian that this is particularly restrictive because “it limits how much money people will spend on non-essentials”.

She said: “Ultimately, the UK has a productivity and demand problem, which when we put together creates a very difficult environment.”

Increased taxes

The Office for Budget Responsibility (OBR) has warned that households and businesses will be affected by £20 billion in extra taxes between 2024 and 2025 – meaning there is less money circulating in the economy.

Hunt has also warned that there probably won’t be any “significant” tax cuts in the spring budget, even though the cost of living crisis has triggered people from across the country to call for higher wages.

Labour force

The pandemic saw a huge chuck of our work force drop off and not return, due to an increase in long-term illness, early retirement and fewer EU immigrants.

This has affected the UK more than other countries, with half a million fewer people working compared to before the pandemic. 

Brexit

Although the IMF did not mention this, trade frictions have further limited growth and Brexit meant fewer EU nationals were joining the UK workforce.

So – will the forecast come true?

Well, it’s quite divided.

Hunt has tried to maintain a bit of optimism around the report, by pointing out that the UK outperformed some predictions in 2022. 

“Short-term challenges should not obscure our long-term prospects,” he said. “The UK outperformed many forecasts last year, and if we stick to our plan to halve inflation, the UK is still predicted to grow faster than Germany and Japan over the coming years.”

He also admitted that the figures “confirm we are not immune to the pressures hitting nearly all advanced economies”.

The Bank of England predicted in the autumn that the UK would be in a recession soon, but that hasn’t (yet) happened.

The Bank will release its own forecasts later this week – and governor Andrew Bailey still thinks a recession is still available.  

Despite this week’s bleak prediction, the IMF still expects the UK to grow in 2024. Having previously predicted it would grow by 0.6%, it’s now on 0.9%.

The IMF also said the UK is now “on the right track”, as Hunt and Sunak’s autumn statement showed the UK was “certainly trying to carefully navigate these difficult challenges and we think that they are on the right track”.

The Office for Budget Responsibility also thinks inflation will fall to 3.75% by the end of this year, compared to the current rate of 10.5%.

Notably, the director of the Institute for Fiscal Studies Paul Johnson told the Radio 4′s Today programme that these forecasts were not always right, but the IMF was “actually being more optimistic than it was a few months ago”.

The IMF has also said that its forecasts are usually within 1.5 percentage points of what happens when it comes to advanced economies.