Manufacturing Struggles and House Prices Slide: UK Economy Update
Introduction
The UK economy is facing numerous challenges, including struggling manufacturing, sliding house prices, limited funds for pre-election tax cuts, and inflation that is difficult to control. Strikes by hospital doctors and railway workers are also expected to continue. The Bank of England’s increasing borrowing costs are further impacting the economy.
UK’s Economic Performance
Despite the gloomy outlook, the UK Chancellor, Jeremy Hunt, has found some positive news. Germany, not the UK, is currently the sick man of Europe and the laggard in the G7. Revised growth data shows that the UK recovered more quickly from the pandemic-induced lockdowns than previously believed. Brexit, it seems, did not hinder growth as much as some commentators assumed.
By the end of 2021, the UK had rebounded from Covid faster than Germany, France, Italy, and Japan. Only the US and Canada outperformed the UK among major western industrial nations.
Context and Challenges
However, it is important to put the UK’s performance into context. Even with the revised data, the economy was only 0.6% larger at the end of 2021 compared to late 2019. The UK still lags behind the four largest European economies, and it may slip to the bottom of the G7 league table if other countries revise their growth figures for the peak Covid-19 years. While Brexit cannot be solely blamed for the UK’s economic challenges, it can be argued that the UK’s performance would have been stronger within the EU.
Impact of Covid-19
A closer look at the updated growth data reveals that Covid-19 and its aftermath have significantly shaped the UK economy since the 2019 election. The lockdown, not Brexit, caused a massive 20% contraction in the economy in the second quarter of 2020. The furlough wage-subsidy scheme and state support for businesses helped the economy grow by almost 17% in the following three months after restrictions were eased.
The second lockdown in early 2021 had a smaller impact, with the economy shrinking by just 1% in the first quarter. It then grew by 7.3% in the second quarter, partly due to businesses adapting to operating with restrictions and the continuation of the furlough scheme.
Ongoing Challenges and Outlook
After recovering lost ground, the UK economy continued to face challenges. Increased demand for commodities and finished goods, coupled with supply bottlenecks, led to inflation. Russia’s invasion of Ukraine further contributed to inflation. Central banks responded by tightening monetary policy to prevent a wage-price spiral.
As it stands, the UK economy is about 1.5% larger than pre-Covid levels, compared to an average of 2.8% for other G7 nations. However, the UK still lags behind other countries and may experience slower growth. Forward-looking indicators, such as the manufacturing purchasing managers’ index, suggest a recession may be on the horizon.
Conclusion
The UK economy faces numerous challenges, including struggling manufacturing, sliding house prices, and inflation. Despite recovering faster from the pandemic than initially thought, the UK still lags behind other major economies. The impact of Brexit and the ongoing effects of Covid-19 continue to shape the economy. The Bank of England’s tough policy stance is expected to persist, keeping interest rates high.
