At risk of recession, the United Kingdom (UK) has witnessed a year of poor economic performance in 2023, and next year does not look promising either.
Inflation in the country has been running high for more than two years, making the cost-of-living crisis a heated topic across the nation. The consumer price index (CPI) rose by 3.9 percent in the 12 months to November 2023, mainly due to a drop in fuel prices and slower growth in food prices.
This was the lowest rate since September 2021, down from a 41-year high of 11.1 percent in October 2022. The drop in inflation was welcomed by households and businesses in the country.
But lower inflation does not necessarily mean lower prices, only that they are rising less quickly.
“The sheer scale and duration of the cost-of-living crisis means that any declarations of victory in the battle to tame inflation are premature. Households are still feeling the pinch,” Lalitha Try, an economist from the think tank Resolution Foundation, said.
According to the think tank, food prices in November 2023 were 29 percent higher than they were in September 2021, and energy prices were 66 percent higher. In a recent Resolution Foundation survey, twice as many families said that their finances had gotten worse through the autumn.
Also, the 3.9 percent inflation rate is still almost double the Bank of England’s 2 percent target. The bank expects the CPI to return to the 2 percent target by the end of 2025.
The basic interest rate currently stands at a 15-year high of 5.25 percent, which was a result of 14 consecutive rate hikes by the bank since December 2021 to cool soaring inflation. Many households are wrestling with both higher interest rates and rising prices.
Meanwhile, the sluggish economic growth has piled pressure on the central bank.
The UK’s gross domestic product (GDP) fell 0.1 percent in the third quarter of 2023, and shrank by 0.3 percent in October.
The central bank expects the country’s GDP to be broadly flat in the fourth quarter of 2023 and 2024, and then have a paltry 0.25 percent growth in 2025.
“2024 is set to be another year of weak growth for the UK, as the pressure of higher interest rates continues to erode household spending power and add to business cost pressures,” Anna Leach, deputy chief economist of the Confederation of British Industry (CBI), said.
Some business surveys do not bode well. The S&P Global/CIPS UK Construction Purchasing Managers’ Index registered 45.5 in November, down from 45.6 in October and below the 50.0 no-change value for the third month running.
Nearly half of firms say the cost of borrowing is negatively impacting their business, a survey by the British Chambers of Commerce (BCC) showed in September. “Firms tell us every day that they are struggling to pay off debts and finding it difficult to take out loans,” BCC Director General Shevaun Haviland said.
Further challenges for UK businesses include trade barriers with the EU and ongoing worker shortages. “Businesses are desperate for a clear, long-term plan for growth, which sets out a vision for infrastructure, skills and green innovation,” the BCC said.
Professor Patrick Minford, an economist from Cardiff Business School, also pointed out that taxes that have been put up hugely by the government have destroyed the long-term growth prospects in the UK.
The big mistake was made by the government of raising corporation tax, “which is a very critical tax for business confidence and incentives,” Minford said, adding that the failure to index the income tax thresholds, which has pushed more and more people into very high marginal tax rates, is also damaging business incentives.
The government is “thinking very short term about trying to get public debt down by raising taxes, instead of hanging tough on taxes, keeping taxes low in order to rebuild long-term growth,” he said. ■