As the cost of living escalates and Brexit may be a factor, the UK economy is expected to shrink and perform far worse than other advanced economies, including Russia. The International Monetary Fund (IMF) forecasts that the UK GDP would decrease by 0.6% in 2023, as opposed to growing by a small amount as previously expected.
The IMF has announced that it has revised downward its projection for the UK due to the country’s high energy costs, rising mortgage rates, higher taxes, and ongoing labor shortages. Brexit was not cited as a reason for the UK’s bad performance in the report. Three years have passed since the UK exited the EU.
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However, Brexit has contributed to the declining UK’s trade openness, trade deals, investment, job, and economic growth. All of these contribute to the country’s economy shrinking. The UK is predicted to be the sole advanced or emerging economy to experience economic contraction. Russia, which is now under sanctions, is even expected to grow this year.
How Brexit has affected the UK economy?
When the UK left the single market and the customs union in 2021, companies that did business with the EU had to follow new rules, fill out more paperwork, and check some goods in new ways. It raised concerns about what would happen to the £550 billion in annual trade between the UK and its closest trading partner.
The UK’s exports to the EU initially decreased. According to official statistics, trade volumes returned to pre-pandemic levels once teething problems were resolved. However, one could argue that trade might have expanded more if Brexit hadn’t occurred.
Since the referendum, investment has halted as firms continue to be concerned about the economy’s outlook. The investment wasn’t tremendous even before 2016. However, a study by the think tank the UK in a Changing Europe estimates it could be approximately 25% higher than it is currently if it had continued its pre-referendum path.
How to account for the discrepancy is a topic of debate among economists. Some have speculated, including the IMF, that the unpredictability of Brexit and the lingering question of the Northern Ireland Protocol have discouraged spending. Business leaders like Sir Richard Branson have said that the cost of Brexit red tape would discourage them from making investments in the UK.
Briefings for Business, an organization that supports Brexit, says that the numbers are misleading and that there is no proof that Brexit has hurt investment.
A points-based immigration system was also implemented as a result of the UK’s decision to leave the EU, which has drawn criticism from unexpected sources.
The research by the think tanks UK in a Changing Europe and the Centre for European Reform reveals, there are 330,000 fewer workers in the UK as a result of Brexit. Even though it barely represents 1% of the workforce, industries including transportation, hospitality, and retail have been particularly heavily hit. The lack of employees has contributed to labor shortages and pushed up bills for consumers.
Many people believed that Brexit was more about sovereignty than the economy. The government’s independent watchdog, the Office for Budget Responsibility, believes that the UK would eventually be 4% worse off than it would have been if it had voted no.
UK tries to reverse the economic downturn
The IMF, though, agrees that the UK is “on the right track” currently. Jeremy Hunt, the UK’s chancellor, said that the country did better than many forecasts said it would last year. However, Rachel Reeves, the shadow chancellor, claimed that the statistics showed that the UK was “lagging behind our peers.”
When an economy contracts, businesses often earn less money and the unemployment rate rises.
According to IMF Chief Economist Pierre-Olivier Gourinchas, the UK had “one of the strongest growth numbers in Europe” last year. However, he claimed that the estimate for this year demonstrated its “high dependency” on costly liquid natural gas, which has increased the cost of living. According to Gourinchas, the UK was “certainly trying to carefully navigate these different challenges and we think that they are on the right track.” It is evidenced by the government’s intentions since November when it revealed its spending plans in the Autumn Statement.
The IMF places responsibility for its negative projection on accelerating interest rate increases, tax increases, greater business borrowing costs, and continuing high domestic energy prices. The fund claimed that the UK has a difficult time managing its circumstances. However, if this prediction turns out to be accurate over the next year, it raises the question of why the UK will have missed out on a more favorable global economic environment.
The need of lowering inflation
Later this week, the Bank of England will release a new economic outlook for the UK along with predictions of additional interest rate increases. The chancellor has stated that reducing inflation “is the best tax cut right now” despite demands from some members of his party to lower taxes in order to boost the economy. Inflation hasn’t been this high in last 40 years.
Prime Minister Rishi Sunak has promised to halve inflation by the end of the year. Many anticipate that it will definitely happen, largely as a result of a decrease in energy price hikes and the alleviation of post-pandemic supply issues.
The Office for Budget Responsibility (OBR) thinks that inflation would drop to 3.75 percent by the end of this year. This is well below half the current level.
Inflation is predicted to decline sharply this year, according to Bank of England Governor Andrew Bailey, who also cautioned that a UK recession is still foreseeable.
While the IMF predicts a decline in the UK economy, it projects growth of 1.4% in the US, 0.1% in Germany, and 0.7% in France. The accuracy of economic forecasts varies from year to year. The IMF claims that for the majority of advanced economies, including the UK’s, their predictions have generally been accurate to within 1.5 percentage points.
Also, the IMF thinks that the UK will grow in 2024, changing its prediction from 0.6% to 0.9%.