Statistics showed that the UK economy grew faster than expected in the second quarter of 2023, consumer confidence increased and public debt was significantly lower than feared, thanks to high tax revenue.
Wages in the UK also rose at a record pace in the three months as of June 2023 and job switching was high, which reflected that workers have been trying to limit the financial impact of high inflation.
However, besides the bright spots mentioned above, the UK economy is facing many challenges due to high inflation and the risk of economic recession. Statistics showed that retail sales in the UK, in August, decreased by 1.2% compared to the previous month. The unemployment rate increased to 4.2% in the three months from June 2023, the highest level in nearly two years. Meanwhile, the PMI, which measures economic activity in real-time, fell to its lowest level since January 2021.
The biggest challenge for the UK economy is still high inflation. Although inflation has "cooled down", the UK commodity prices still increased at an annual rate of 6.8% in July 2023, more than three times the target of 2%.
High inflation has "blown away" the salary increase achievements mentioned above, because statistics showed that total salaries increased by 21% from three months to February 2023, but when it is adjusted according to inflation, this number is almost constant. In January 2023, British Prime Minister Rishi Sunak pledged to reduce inflation by half, by the end of this year, in the context of the general election taking place next year.
At that time, headline consumer price inflation was at 10.1% and most economists predicted the rate would halve after the energy price shock passed, making Sunak's pledge fully feasible. However, inflationary pressure in this country is still high, forcing the Bank of England (BoE) to reassess inflation forecasting mechanisms.
Meanwhile, external conditions are unfavourable to the UK economic growth, in the context that economic leaders in the region and the world, such as Germany and China, are still sluggishly "going uphill" to escape the risk of recession. The Russia-Ukraine conflict and the "headwinds" from economic sanctions on major countries are still creating obstacles to British economic growth. “What we are seeing is an economy that is suffering from a big terms-of-trade shock”, said James Smith, research director at the Resolution Foundation.
According to Smith, the Russia – Ukraine conflict and the imposition of increased trade barriers with the European Union (EU) after Brexit, created a "shock" that led to a rapid increase in prices and wages and a rise in interest rates. All has been starting to create some traction in the UK's real economy.
Thomas Pugh, an economist at the RSM's UK wing, said in fact, the size of the UK economy has shrunk from its pre-pandemic level in the last three months of 2019. Meanwhile, the National Institute of Economic and Social Research (NIESR), an independent research institute, has just released a report on the economic outlook, in which it is forecast that the UK is facing the prospect of “losing” growth.
NIESR forecasts that the UK Gross Domestic Product (GDP) will only increase by 0.4% in 2023 and 0.3% in 2024, and there is even a possibility that UK GDP growth will decline at the end of 2023 and there was even roughly a 60% chance the economy will fall in the risk of recession at the end of 2024. The NIESR’s report states that the UK is headed for five years of lost economic growth since the aftermath of the global financial crisis. The report also paints a grey picture for British workers in 2024, the year of the general election, that inequality in income and assets will increase, as many people's real income will rise little, with low or no savings and higher debt, as well as housing, energy and food costs rising.
The UK is the world's largest economy, with the GDP accounting for about 3.3% of the total global GDP. Therefore, the challenges and risks of economic recession in the Land of Fog as above, reflect the difficulties of the European economy in particular and the world in general. The above reality shows that in the context of the COVID-19 pandemic gradually receding, fighting against inflation and stimulating growth is still an "immediate need to do" for most major economies in the world.