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While most of the UK’s economic forecasts point towards slowing growth, some predict higher inflation and supply chain disruptions in the near future. This article will discuss the implications of these events for the UK economy. It also discusses the potential impact of Russia’s invasion of Ukraine. There are a number of reasons why the UK economy is expected to experience these problems. Read on to discover what you should be doing to prepare for these problems.
Economic growth is expected to slow
The UK is set to face a slowdown in economic growth next year after the Bank of England cut its growth forecast for the year. Following the EU’s invasion of Ukraine and the Covid-19 crisis, it is now difficult to predict future growth in the UK economy. The IMF has forecast that UK GDP will grow at the weakest pace among the G7 economies in 2019. The Bank has also raised interest rates to combat rising inflation.
The UK economy is set to expand by 3.7% in 2019, a slight downgrade from January’s forecast. Growth in 2023 is likely to slow to just 1.1%. However, a squeeze on household budgets is expected to dampen consumer spending. Rising costs and higher taxes have put unprecedented pressure on household budgets, which is likely to lead to a marked slowdown in annual consumption growth.
The war in Ukraine has slowed the global recovery and pushed up fuel and food prices. The IMF has cut its forecasts for both the UK and the rest of Europe, resulting in a more gloomy outlook. This means that the UK will no longer be the fastest growing economy amongst the G7 group of leading Western nations, and that its economy will slow to the weakest in 2023.
While the UK economy is still expected to grow by 5% in 2020 and 2021, the pace of growth will slow in 2022 and 2023 as fears of inflation and a global trade war raise the cost of borrowing. In order to repay debt, global cooperation is essential, but this has been lacking in recent years. A war-torn Ukraine is already having an effect on the UK economy, reducing the rate of growth by up to 1.7 percentage points in Germany.
The Bank of England previously forecast 1.25% growth in 2023, but they revised this downward to -0.25%. Negative growth would constitute a recession if two quarters were recorded. It would also be unusually shortening the recent economic cycle. However, it will continue to be an important indicator to monitor and to be a concern to all. And, with Brexit looming, the UK economy is likely to face more problems in the future than it does in the present.
Inflation to be higher in the UK
If the current trend continues, inflation in the UK is set to increase in the coming years. Higher prices for food and fertiliser will contribute to a rapid increase in costs. Other areas where prices are expected to rise are airfares, which have already skyrocketed. This is due in part to pressure on jet fuel. But what can be done to prevent these increases? Inflation forecasts are based on the latest data available.
The IMF’s latest World Economic Outlook forecast showed that the UK’s inflation would increase by 7.4% in 2018 and 5.3% in 2023, putting the UK in a situation where it’s already high. If the BoE continues to raise interest rates, the inflation rate is expected to fall back to around two per cent. The IMF report also emphasized that inflation will remain low in most advanced economies in 2019, which makes the UK’s current situation even more challenging.
The March figures were mixed. The medium and high projections were similar, but the medium scenario had an upper limit of 4% while the high scenario was predicted to reach 5.3% in March. The medium scenario’s peak would occur in March 2022. The high projection, however, will reach a peak of 6% in March 2023, which is higher than the low-stress scenario. The low-stress scenario has a more rosy outlook.
The UK inflation rate has been rising over the past year. Inflation is a measure of the speed at which prices increase. The current rate is expected to go down next year and drop back down to below two percent within two years. The causes for this high inflation rate won’t last for long and some prices may stay high compared to the past. It is still important to monitor the rate of inflation.
The war in Ukraine will affect all commodities. Inflation in the UK will increase because supplies will be limited. Western powers, including the US, Canada, Western Europe, Japan, South Korea, Singapore, and Taiwan, have imposed sanctions against Russia. The impact of these sanctions on the UK economy depends on the secondary sanctions on other countries that trade with Russia. For example, if sanctions are imposed against China, this will affect the price of rice and oil.
Supply chain disruptions
Global supply chain disruptions are threatening to derail global economic growth, and the IMF has warned that the bottlenecks could extend into 2023. If Brexit-related customs procedures don’t get in the way, the UK and eurozone economy could grow by two percentage points by 2023. However, supply chain disruptions can wreak havoc on the UK economy even sooner. In fact, the IMF said that without Covid lockdowns, global economic growth would be two percent higher in 2023.
Despite rising inflation, central banks are tightening policy to prevent inflation. The Bank of England has already raised interest rates twice in the past three months, and markets expect five more. In the second half of the year, inflation is projected to return to Bank of England’s target of 2%. In the UK, interest rates are expected to stay at present levels, but will increase to 2% by mid-2023.
Meanwhile, the UK exporters aren’t exploiting the revival of EU domestic demand, and merchandise exports to the EU fell 13.0% in 2021, while exports to the US and China increased by 14.3% y/y. Furthermore, UK firms depend on hundreds of thousands of SME exporters across the EU to meet their supply needs. This will stifle their ability to expand globally.
In June, the Confederation of British Industry revised down its forecast for UK GDP. The UK economy is expected to recover from the coronavirus slump, but the disruption will likely remain, even if the government raises interest rates. However, the emergence of the Omicron variant could complicate the process further. Furthermore, the UK economy will be subjected to ongoing supply chain disruptions, and there may be a shortage of labour.
Impact of Russia’s invasion of Ukraine
In the UK, household consumption was expected to drive economic growth after the Covid recession, and there is a risk that this could be undermined by a renewed Russian conflict. Furthermore, falling consumer confidence in the UK is likely to exacerbate this impact. Moreover, the war with Russia will exacerbate already existing problems, as households will delay investment decisions and consumption. However, the overall impact of the conflict on the UK economy is unlikely to be catastrophic.
The most serious economic impact of Russia’s invasion will be on the European Union, which depends on Russian energy for 60% of its needs. It will also impact on food supplies, with some countries finding it harder to pay Russian energy conglomerates. In addition, the country’s physical infrastructure will likely be damaged, disrupting the flow of Russian gas through Ukraine. And the UK economy will be affected by a number of measures, which make international trade increasingly difficult.
There are several ways to respond to the war. For instance, UK panel members believe the Bank of England should cut interest rates and increase public spending. However, there is a split on whether increased spending should exceed inflation. Moreover, the panel disagrees on whether taxes should be raised to counteract inflation. If all these factors are present, the economy will suffer. So, the UK economy should prepare for this eventuality.
Clearly, the West is waging an economic war against Russia. However, some countries have not fully committed to this “war effort.” The West must do everything it can to aid Ukraine and weaken Russia economically. For this, a new “financial NATO” should be established. And, the EU must do whatever it can to prevent further damage to the Ukraine.
The UK’s energy consumption is much lower than the rest of the EU. It accounts for 64% of its total energy consumption. However, Russia accounts for a large proportion of the world’s oil and gas production. Its high dependence on oil and gas means that higher prices for both fuels will impact UK consumers and businesses. It will be harder for the UK to compete in the global energy markets.