Gloomy prospects of the UK economy

Sunday, 2022-05-22 09:12:06
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People shop at a market in London, the UK. (Photo: Reuters)
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NDO – With a 9% rise in April, inflation in the UK is now the highest among the world's leading developed economies (G7). Problems that have not been easily removed in the post-Brexit trade relationship with the European Union (EU), along with high energy prices and labour shortages,are creating gloomy prospects for the UK economy.

The severe effects of the epidemic caused the UK economy to shrink at a historic rate in 2020 before rebounding a year later as the strongest in the G7 group. However, a series of recent statistics point to a not-so-bright outlook for the world's fifth-largest economy. According to the UK Office for National Statistics, the UK's GDP shrank 0.1% in March 2022, achieving growth of only 0.8% in the first quarter of 2022, lower than the 0.9% forecasted by the Bank of England and the 1% that economists expected in an interview with Reuters.

One of the reasons why inflation in the UK is now rising to the highest level since the early 1980s is the sudden increase in world energy prices. While EU countries have continuously made drastic calculations and steps to be self-sufficient in energy supplies, the UK has not been able to overcome its overwhelming dependence on imported energy.

The UK Government's £22 billion support in the current financial year is not enough to cool down the inflationary fever. To increase budget revenue, the Government must raise taxes, making the UK the only economy in the G7 to make this move in the context of high inflation. According to a study by the Ministry of Finance, people's incomes could fall another 2% in the near future and would be the steepest decline in 65 years.

Meanwhile, the trade relationship between the UK and the EU has not yet been free from problems after the “divorce” called Brexit. Under the Northern Ireland Protocol, which is part of the Brexit deal, to avoid having to establish a hard land border between Northern Ireland (UK) and the Republic of Ireland (EU), while ensuring goods moving from the UK to the EU are cleared through the EU. Consistent with European single market standards, the parties agreed to establish control points for goods from the rest of the UK to Northern Ireland. However, to date, the UK and the EU are still exchanging words on how to handle issues related to the Northern Ireland Protocol.

On May 17, the British Government announced its intention to make changes to post-Brexit trade regulations in Northern Ireland, as it was necessary to end the “political paralysis” in this territory. Recently, many protests have taken place against the implementation of the Northern Ireland Protocol. Meanwhile, the EU side still firmly stated that it did not change its position on the Northern Ireland Protocol, because this document is an important part of the Brexit deal that the two sides have worked so hard to achieve.

In the post-Brexit era, many UK businesses and government agencies struggled with labour shortages. Many foreign workers have left the UK, the elderly have quit their jobs due to the epidemic, and young workers are inexperienced. The UK National Audit Office says the UK is facing significant challenges in maintaining post-Brexit regulatory regimes, due to a severe shortage of staff. For example, at the Competition and Markets Authority, 25% of the positions providing legal services on the post-Brexit pension scheme are vacant.

A group of more than 50 economists, including a Nobel laureate in economics, have sent a joint letter to the finance minister, warning that the UK’s post-Brexit plans that are intended to boost competitiveness of the financial sector risks giving rise to problems that could lead to a global financial crisis. Instead of focusing on the competitiveness of the financial industry, what the UK needs to do now is set clear goals to promote the growth of the entire economy, ensure the integrity and stability of the market, as well as protect consumers and businesses.

Pushing forward with its post-Brexit plans, the UK government has announced it will ask regulators for support to ensure London remains a global financial hub. However, from the point of view of experts, it is clear that the UK needs a more holistic view and stronger motivation to dispel the cloud that is covering the economic growth prospects of the country.

Translated by NDO