The UK economy is running out of places to look for good news as its economy continues to struggle with inflation while its neighbors in Europe are being left behind by rising prices. This is now likely to impact the country’s growth prospects.
On Thursday, the Organization for Economic Co-operation and Development (OECD) published its latest forecast for developed countries, and the UK did not read it very well.
The country was one of the few countries whose forecasts were lowered by the organization, with the economy now expected to grow 0.4% instead of 0.7% previously.
Although its economy is expected to grow faster than Germany’s, which is forecast to grow by just 0.2% this year, the UK is trailing behind the eurozone, which is forecast to grow 0.7% overall in 2024 .
It is the latest worrying data for Britain, which is struggling to shake off high inflation and is still feeling the effects of the reputational blow from the 2022 budget crisis.
That has at least prompted analysts to find a simple way to sum up the embattled nation, said Jens Eisenschmidt, Morgan Stanley’s chief European economist.
“Think about Europe, but it’s a little worse,” is how Eisenschmidt describes the UK’s current economic situation.
This view is confirmed in the latest OECD forecast, and it keeps the country’s policymakers in a tight spot.
Britain’s central bank, the Bank of England, is expected to be slower than the European Central Bank (ECB) in cutting interest rates to boost growth, Eisenschmidt says.
The UK suffers from harsher inflation than its European counterparts. Prices in the eurozone rose 2.4% in April, while the UK consumer price index stood at 3.4% in March, accelerating the decline in interest rates in the eurozone.
Eisenschmidt said the source of such severe inflation is a matter of debate. However, the blame can be laid on the UK’s growing unemployment crisis.
Economic inactivity is rapidly rising in the country, fueled by rising trends in long-term illness and youth unemployment.
The country has not been able to benefit from migration flows to offset the 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 outlined in the September 2022 currency crash budget.
Eisenschmidt said the pressure left the UK “more vulnerable to the need for domestic discipline” in the short term.
The results of this year’s UK general election, the date of which has not yet been set, is another important short-term variable affecting the health of the economy.
Population aging
The UK must get used to the trend of labor market flows having a huge impact on economic performance.
Eisenschmidt said developed European countries share the common threat of aging populations. As demographics age, developed countries are expected to grapple with labor shortages, exacerbated by the need for labor to care for older citizens.
As Eisenschmidt notes, countries will increasingly rely on immigration from younger countries to fill gaps in the labor market.
However, in recent years the UK has developed a reputation as a country focused on the domestic market. The country voted to leave the European Union in 2016 in a debate that focused on immigration levels from other EU countries.
Domestically, the government’s controversial plan to deport asylum seekers to Rwanda has become a controversial issue in recent months.
Despite this, overall immigration into the UK has been steadily increasing since the Brexit vote. However, net migration fell as more people left the country after the vote.
However, according to Eisenschmidt, the UK still appears to be one of the best places for foreign residents, despite its own attitude towards immigration.
“One of the key indicators of long-term success or less relative decline is your ability to attract migrants and include them in the workforce.
“I would say that from my point of view the UK is not that bad, simply because of the language and excellent educational institutions which have a lot of brand value abroad.”