The UK economy is in turmoil, but there are signs of hope

TThe death of Queen Elizabeth II and the ensuing national mourning has been the latest blow to Britain’s already struggling economy, but economists and analysts say there is hope.

Britain is at a watershed moment. The country has just ended a 10-day period of mourning, which ended with nationwide shutdowns during the public holiday to mark the late monarch’s funeral. His death comes just two days after new Prime Minister Liz Truss took office, after her own party ousted the last leader over inappropriate behaviour, while the UK faces a cost-of-living crisis unlike any the nation has seen. for decades. Inflation has risen to its highest level since the 1980s, at around 10%, and the country is facing an energy crisis due to declining Russian energy exports to Europe. The British pound has hovered around near 37-year lows against the dollar. And economic growth is another concern – the UK has now overtaken India, a former British colony, to become the world’s sixth largest economy. The UK’s central bank, the Bank of England, has warned that it could fall into a recession that could last until 2024.

The death of Queen Elizabeth II is the latest thing to touch the British psyche. Although the monarchy is often seen as an anachronism, it remains an important part of UK life. It is likely to continue under the new monarch, King Charles III, who joined on the Queen’s departure.

“It really feels like we’ve entered a new era in the UK as a whole,” says Craig Erlam, senior market analyst at multi-asset broker OANDA. “It makes for a very interesting time for the country and its place in the world.”

The monarch has a largely symbolic role, not a political one. That said, the change shouldn’t be too controversial, Erlam says. However, this is difficult to follow. “He was an incredibly beloved figure,” she says. “I just wonder if there is the same love and devotion for King Charles.”

Britain’s growing economic pressure

When third-quarter gross domestic product data is released, it could show that the public holiday of Queen Elizabeth II’s funeral on Sept. 19 dampened economic growth slightly, pushing the economy into a technical depression, marking two quarters of negative growth. , says Steve Clayton, head of equity funds at UK-based Hargreaves Lansdown. This is due to lower productivity and economic output. A similar thing happened in the second quarter, when an extra holiday was given to celebrate the Queen’s platinum jubilee and the economy contracted by 0.1%, according to data provider Trading Economics. “Whatever effect it has, it’s temporary,” he says. That’s because it’s unlikely to change spending on cars, TVs, food and other items, he says. In addition, some food banks planned to close on the day of the funeral, meaning people in dire need were unable to get essential items.

This does not mean that spending habits have not changed. Clayton has noticed a decline in consumer spending, likely due to the country’s energy crisis and recent interest rate hikes. UK grocery delivery retailer Ocado, popular with Britain’s middle-class consumers, recently announced that its customers were spending less, sending the company’s shares plunging. According to Clayton, it’s also partly the harsh reality of higher home loan costs.

Many homebuyers use variable rate mortgages to purchase real estate. The Bank of England raised its lending rate to 1.5% from 0.35% last November. This will have a direct impact on many UK residents with adjustable rate mortgages. To make matters worse, the central bank raised interest rates by 0.5% today – the seventh consecutive increase – which has cut into the budgets of many British households. “It’s going to hurt those with large flexible-rate mortgages,” says Clayton.

Then there is the energy crisis, which threatens to make half of the households unable to buy heating. The price of natural gas in Europe has recently more than tripled to 217 euros ($217) per kilowatt-hour, compared to around 70 euros a year ago, according to Trading Economics. The increase came as Russia cut off natural gas supplies to Europe following its invasion of Ukraine. This price jump directly affects higher electricity prices and heating costs.

Earlier this summer, Britons were warned that energy bills could exceed £6,000 ($6,960) a year by April 2023 due to high heating costs this winter. According to government statistics, this is nearly 20% of an average household’s annual after-tax income of £31,500. Some people don’t have the money to pay their bills, experts say.

It has also warned that more than one in five UK businesses with a turnover of more than £1m ($1.16m), around 76,000, could be insolvent due to higher energy bills, according to financial research firm Red Flag Alert. People with higher energy consumption, such as industrial companies, are at greater risk.

Liz Truss emergency plans for the economy

Two days after becoming Prime Minister, Truss announced a cap on household energy bills of around £2,500 a year for the next two years, with the Government paying the difference. The government has also unveiled a £40 billion ($45 billion) plan to help businesses by capping wholesale energy prices for businesses for six months. Some have criticized the measures as filling the coffers of energy companies, which are expected to profit from rising energy costs.

The UK’s new Chancellor of the Exchequer, Kwasi Kwarteng, will announce the government’s much-needed plan to tackle the cost of living crisis on 23 September. The fiscal emergency was earlier expected but was put on hold until Parliament was suspended for mourning. period. The so-called mini-budget is expected to include tax breaks for businesses and individuals, as well as reductions in unnecessary regulations.

“One of the more compelling stories is the UK economic policy mix,” says Marc Chandler, managing director of Bannockburn Global Forex. Specifically, this means loose fiscal policy (more spending, lower taxes) and tight monetary policy with higher interest rates. It was US policy used in the early 1980s that led to a period of stellar growth.

Chandler also thinks the mix of policies will go some way to solving the country’s other problem: the falling pound. Sterling recently hit its lowest level against the dollar since the mid-1980s. He says the fall in the pound is largely due to the outrageous strength of the dollar. The currencies of other rich countries, notably the euro and the Japanese yen, have fallen similarly. Chandler says sterling has rarely been as undervalued as it is now, and he expects it could begin to recover after the dollar peaks, which he estimates will come in early 2023.

Truss also wants to ensure a stable energy supply in the future, says Ivo Pezzuto, Professor of Global Economy and Digital Transformation at the Paris International School of Management. Higher prices lead to less demand, but that doesn’t fix the fact that the Kremlin’s natural gas cutoff is a supply problem in Europe. “They need more supply,” he says. Gone are the days of building the economy around cheap Russian oil and gas.

Unlike the rest of Europe, Truss’s plan does not involve imposing a windfall tax on energy companies. He wants to encourage more drilling and has lifted a ban on hydraulic fracturing oil drilling or fracking. The establishment of a robust energy policy that includes new technology, including nuclear power and renewable energy sources, is also discussed. “Some of it takes time to pay off,” says Pezzuto.

There are other signs of hope in the economy. The unemployment rate, at 3.6%, is the lowest since the 1970s. There are currently 1.3 million job vacancies versus 1.5 million unemployed. Simply put, the labor market is tight, which gives workers the right to demand higher wages, which in turn helps offset the rising cost of living. “Employers probably won’t hold wages down for long,” says Clayton.

But rising wages come with a caveat. If wage demands swell too much, the Bank of England may worry about persistent inflation. The result could be aggressively higher interest rates, said Konstantinos Venetis, director of global macroeconomics at London-based financial firm TS Lombard. If that happens, the economy could take a hit.

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