Newspapers across the world put it in different terms. “Britain is on the brink of becoming an economic basket case” lamented The Telegraph. “Britain’s Cautionary Tale of Self-Destruction” was how The New York Times described it. The IMF recently forecast the UK economy to contract 0.6% in 2023. That would not just be worse than all other G7 economies—it would also be worse than warring and sanctions-hit Russia. Our panelists are even more bearish on Britain than the IMF: They expect the UK’s economy to contract 0.8% this year.
Our forecasts suggest that this is largely due to weaker private spending. Our panelists see consumers spending 1.0% less this year than last year. Given that consumer spending makes up around 60% of the UK’s GDP, this would imply a negative 0.6 percentage point contribution to growth in the British economy next year. In other words, weaker private spending will be responsible for approximately 75% of next year’s recession.
In contrast, private spending is forecast to grow in the Euro area by 0.1% and in the U.S. by 1.0%. One reason that Britain expects a sharper fall in private spending than the Euro area or the U.S. is that inflation in Britain has peaked at higher levels and has been more persistent, hurting household purchasing power. Higher inflation is due to several factors, such as Britain’s heavy dependence on energy imports and its sudden reopening from Covid-19. Brexit, of course, is the elephant in the room; it has exacerbated price pressures by creating trade barriers and worker shortages. It has also hurt economic growth through other avenues, such as by hitting exports and investment.
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Kallum Pickering and Holger Schmieding, senior and chief economists at Berenberg, respectively, said:
“From 2013 to 2019, the UK was a top-performing economy on a par with the US – despite significant fiscal austerity and the rebuilding of banks, businesses, and household balance sheets. But since the Brexit referendum in June 2016 and—even more so—since leaving the EU Single Market in January 2020, the UK has turned into a laggard. Whereas Eurozone GDP is 2.4% above its Q4 2019 level and US GDP is 5.1% above, UK GDP remained some 0.5% below.”
Analysts at ING commented on the labor market ahead:
“The jobs market [should] stay more resilient than in past recessions. With a recession looming, it’s hard to see how the jobs market can stay this tight. An unemployment rate of 3.5% looks like a trough. Equally, worker shortages are proving much more persistent than expected and so far there are few signs of overt weakness other than a modest reduction in vacancy numbers.