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United Kingdom facing economic struggles in 2023

Published by Tavex Analysts in category Market News on 03.02.2023
Gold price (XAU-GBP)
1,833.14 GBP/oz
  
- GBP10.70
Silver price (XAG-GBP)
23.80 GBP/oz
  
- GBP0.08

In the 1970s, the United Kingdom was infamous as the “sick man of Europe.” Today, the United Kingdom seems to have gained a similar reputation as the “sick man of the developed world.” This week, the IMF predicted that Britain will be the only major economy to contract this year. This grim outlook was released coincidentally on the third anniversary of the UK’s departure from the EU. Although Brexit is not the only cause of Britain’s poor performance, it is a contributing factor. To revitalize growth, it is necessary to implement strategies to mitigate the impact of Brexit as part of a larger plan.

 

The IMF’s predictions may be too bleak. Nonetheless, the UK is certainly falling behind its counterparts as it experiences the worst of two economic situations. Like the US, the UK has a tight labor market due to a reduced workforce post-pandemic. Also, similar to other European countries, Britain is facing high energy prices. The ill-fated “mini” budget during Liz Truss’ brief time as Prime Minister resulted in increased borrowing costs, which have declined but are still impacting households and businesses.

 

A 2023 recession will compound years of underperformance: the UK is the only major economy that has not regained its pre-Covid size. Productivity growth and business investment were anaemic pre-2016, but few economists dispute that Brexit has exacerbated the UK’s weakness since the referendum.

 

Business investment has plateaued due to political and economic uncertainties and the creation of trade barriers with the UK’s largest partner. The UK’s trade recovery post-pandemic has lagged behind other major economies. Despite the newfound regulatory freedoms and new trade agreements with countries such as Australia, they are unable to compensate for the harm caused.

 

The EU departure has also impacted the standard of governance. Several Conservative governments have struggled to reconcile the belief of Brexit supporters that it would allow for the creation of a low-tax, small-government economy with the expectations of many Leave voters for more government involvement.

 

Conflicting visions

Boris Johnson, who abandoned the industrial strategy of his predecessor Theresa May, attempted to balance the conflicting beliefs by promising to “get Brexit done” while embracing a big-government approach. However, Covid-19 severely impacted the public finances. Liz Truss’ failed attempt at growth through massive tax cuts without proper funding, in turn, rejected Johnsonism. Rishi Sunak has shifted direction again. These changes in policy have resulted in a lack of consistency in economic policy and further exacerbated businesses’ hesitance to invest.

 

As polling data indicates, politicians from all parties must acknowledge the impact of Brexit and the need for improvement in the UK’s basic trade deal with the EU. Resolving the trading disputes with Northern Ireland would be a positive development. However, the UK must also tackle the underlying factors that are hindering its growth potential.

 

As a first step, the government should renew or extend its super-deduction on capital spending, which is set to end in April, in order to encourage business investment. Additionally, the planning system requires reform to facilitate construction on unused land.

 

In addition to increasing employment, including through better childcare support, Britain needs to establish a more flexible training and education system. To capitalize on the UK’s strength in creating start-ups, more investment needs to be directed towards innovative companies; a proposed reduction in R&D tax credits is a setback. Supporting growth in secondary cities through decentralization will be critical in revitalizing the “levelling-up” initiative.

Gold price (XAU-GBP)
1,833.14 GBP/oz
  
- GBP10.70
Silver price (XAG-GBP)
23.80 GBP/oz
  
- GBP0.08

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