There is nowhere to look for good news as the UK economy continues to grapple with inflation while its European neighbors put rising prices behind them. Now it could affect the country’s growth prospects.
The Organization for Economic Co-operation and Development (OECD) released its latest forecasts for developed countries on Thursday, but the UK’s interpretation is not optimistic
The country was one of the few to have its outlook downgraded by the group, with growth now expected at 0.4% instead of the previous 0.7%.
Although the British economy will still grow faster than Germany (Germany is expected to grow only 0.2% this year), the British economic growth is losing to the euro zone, which is expected to reach 0.7% in 2024.
It’s the latest troubling data point for the UK, which is struggling to shake off high inflation and is still feeling the effects of a reputational hit from a budget crisis in 2022.
That at least gives analysts an easy way to sum up the troubled country, said Jens Eisenschmidt, chief European economist at Morgan Stanley.
“Think of Europe, but everything is worse,” is how Eisenschmidt describes Britain’s current economic situation.
That sentiment, confirmed in the OECD’s latest outlook, has put the country’s policymakers in a difficult position.
Eisenschmidt said the Bank of England is expected to be slower than the European Central Bank (ECB) in cutting interest rates to stimulate economic growth.
The UK is suffering from worse inflation than the rest of Europe. Prices in the Eurozone rose by 2.4% in April, while the UK Consumer Price Index (CPI) in March was 3.4%, which accelerated the pace of interest rate cuts in the Eurozone.
Eisenschmidt said the origins of this increase in inflation are controversial.However, this could be blamed on the UK’s growing unemployment crisis
The country’s economic inactivity has been soaring, exacerbated by rising secular disease trends and youth unemployment.
Unlike the EU common market, the country has not been able to benefit from waves of immigration to offset the effects of tight labor markets.
As the September 2022 Currency Strike Budget concluded, as a small open economy, the UK is more vulnerable than the EU to capital flight following market shocks.
Eisenschmidt said these pressures made Britain “more in need of family discipline” in the short term.
The outcome of this year’s UK general election is yet to be determined, another major short-term variable affecting the economy’s fortunes.
aging population
The UK should get used to the tendency for labor market flows to have a huge impact on economic performance.
Eisenschmidt said that developed countries in Europe face the common threat of population aging. Developed economies are expected to face labor shortages as their populations age, a problem exacerbated by labor demands to care for older citizens.
As Eisenschmidt points out, countries will increasingly rely on immigrants from young countries to fill gaps in the labor market.
However, Britain has developed a reputation for introversion in recent years. The country voted to leave the EU in 2016 amid a debate that focused largely on immigration levels from other parts of the bloc.
At home, a melting pot issue in recent months has been the government’s controversial plan to deport asylum seekers to Rwanda.
Despite this, total immigration to the UK has continued to rise since the Brexit vote. However, net migration fell as more people left the country after the vote.
Eisenschmidt said the silver lining was that despite Britain’s mixed attitudes towards immigration, it remained one of the best places for foreign residents.
“A key measure of long-term success or relative decline is the ability to attract immigrants and integrate them into the labor market.
“I would say that from my perspective the UK doesn’t score too poorly, simply because of its language and excellent educational institutions that have huge brand value abroad.”
