UK Economy Crisis |
| Credit: Pharmaceutical Technology |
BREXIT FACTOR AT PLAY
Brexit has lead to greater trade barriers and labour shortages. This is leading to a bigger trade off between growth and inflation. This means that in the UK inflation is more difficult to control as a result of the lack of flexibility in the labour market caused by Brexit. Not only this but an increase in import prices for manufactured goods & raw materials coming in from europe is destined to increase - leading to incumbent UK firms inflating their prices in order to prepare.
The british chambers of commerce yesterday pleaded the government to review urgently its shortage occupation list, as hotels and restaurants turned away clients amid staff shortages.
The illusion of giving a boost to the UK economy with a reduction in taxation has clashed with the new needs for public spending for healthcare, the fight against the climate crisis, infrastructure investments, and the various electoral promises to the point of forcing the government to raise taxes. Instead of diverging, policies in the UK and the EU look increasingly alike.
BREXIT TRADE IMBALANCE
EU countries have, on the whole, absorbed the shock of Brexit. But in Britain, trade is down - and prices are up. The UK share of world trade has fallen by a further 15% compared to pre-referendum projections.
Since 2016, the flow of EU workers to the UK has been in decline. That process accelerated last year, causing major imbalances in hospitality, agriculture, transport and healthcare, but also in some highly qualified jobs. The corresponding impact in the EU is a greater pool of labour in some countries and less of a brain drain, which increases unemployment but over time becomes a positive supply-side phenomenon. Again, while the impact is sizeable for the UK, it is very much diluted in continental Europe.
LOSS OF CONFIDENCE
Sterling has fallen markedly against the dollar over the past year, adding to inflationary pressure for imported fuel and energy. Although the figures are volatile, the key measure of UK trade performance, the current account, reached its worst levels in record in the first quarter.
Retailers too have said they have started to expect different outcomes for the UK versus the rest of the Europe. The boss of the owner of BOOTS, STEFANO PESSINA, said he suspected the UK "will have a big recession, probably bigger than other European countries".
Last month PEPCO, which owns POUNDLAND, said in its results that in the UK customers were scaling back even on essential purchases. Whereas elsewhere in europe, where wage rises were making up for price rises, this was not the case. Some measures of household consumer confidence are hitting record lows in the UK.
This is not good because if firm's profits decrease due to less spending they are less likely to increase wages. Therefore real wages are going to decrease.
POST PANDEMIC CHALLENGES
The Covid Pandemic has hit the UK economy harder than most other oecd countries and the west midlands harder than most other UK regions. The resulting economic shock has led to significant falls in output, productivity, and employment as well as new levels of inequality.
The UK economy is experiencing its worst labour shortage since 1997. Job vacancies in the UK are at an all time high. According to the office for national statistics, there were 1.29mn positions waiting to be filled in the first quarter of 2022, nearly 500,000 more than before the pandemic struck.
Some industries are clearly floundering: British Airways staffing disaster reflects wider problems in aviation, while job adverts still fill the windows of many pubs and restaurants. As a result, it's safe to say the demand is certainly outstripping supply right now.
This unemployment is due to an increase in occupational immobility and many skilled workers not wanting to go back to work after the pandemic or looking for work that allows them to stay at home.
The govt has also acquired a huge level of national debt and increasing benefits is not helping them. The increase in energy prices has meant the Govt. needs to step in even more to help the low income population. Future tax payers will be left with large interest payments on debt to pay off. Debt repayments have an opportunity cost as future Govt. may have to cut spending to pay off the debt, which may harm economic growth.
FINAL THOUGHTS
A common energy shock, explains most of the inflation we have seen. The structure of the energy price cap may explain why we have spiked now, later than the rest of europe. But if over the coming year these inflation numbers stay higher for longer here in the UK than the rest of advanced European and world economies, the shadow of Post-Brexit policy changes only really affecting this country will loom large.
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