The UK economy has experienced sluggish growth since 2019, even before the onset of the pandemic, leading to concerns among economists. In May this year, it contracted by 0.1%, partly due to an additional bank holiday for the King’s Coronation, resulting in fewer working days. Rising living costs and higher interest rates have exerted pressure on households and businesses.
When an economy shrinks, it can lead to job losses and difficulties in securing adequate pay raises that keep up with inflation. The current inflation rate stands at 8.7%. To counter price increases, the Bank of England has been raising interest rates. However, this has had a ripple effect on consumer borrowing costs, leading to increased mortgage and loan repayments for millions of people.
Concerns hitting responsible offices hard
Chancellor Jeremy Hunt acknowledged that high inflation is negatively impacting the economy. He emphasised the importance of reducing inflation swiftly to reignite growth and alleviate the strain on families. Hunt stated that although their plan will be effective, it requires steadfast adherence.
The Office for National Statistics (ONS) reported that the decline in economic activity in May followed a 0.2% growth in April. Sectors such as manufacturing, energy, construction, and sales at pubs and bars experienced declines. However, the health sector displayed signs of recovery, and the IT industry had a robust month. Strikes also had a lesser impact on the economy compared to April. The ONS noted that the King’s Coronation, which introduced an extra bank holiday in May, slowed down certain industries while benefiting others, such as those in arts and entertainment.
For most individuals, economic growth is beneficial. It typically leads to increased employment opportunities, higher profits for companies, and the ability to provide higher wages for employees and returns for shareholders. Moreover, a growing economy generates greater tax revenue for the government. They can choose to allocate these funds towards welfare, public services, government workers’ salaries, or implement tax reductions.
While Capital Economics argued that the 0.1% decline in May was partially influenced by the additional bank holiday, they projected that GDP would likely rise by approximately 0.1% in the three months lead up to June. Paul Dales, the chief UK economist at Capital Economics, expressed that underlying economic activity continues to grow, albeit at a sluggish pace. Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, has expressed caution regarding the growth figures observed in May. According to Tombs, these figures suggest a continued lack of vigor in economic growth. Martin Beck, chief adviser to the EY Item Club, emphasised that the larger perspective reveals a persistently weak economy. In the three months leading up to May, there was no growth, and the economy was only 0.2% larger than its pre-pandemic size in May 2019, indicating minimal progress since the end of 2019.
Why this is happening?
In early 2020, the Treasury and the Bank of England faced no alternative but to adopt a bold approach due to the on-going global pandemic. Rishi Sunak, the Chancellor of the Exchequer, borrowed more than any previous peacetime chancellor in order to ensure furloughed workers received their wages. The Bank of England reduced interest rates to an all-time low of 0.1% and injected billions of pounds into the economy through quantitative easing, a bond-buying program.
This decisive action proved successful in preventing a health crisis from escalating into an economic catastrophe. However, the current approach has shifted towards a more cautious strategy, with the Treasury and the Bank adopting conservative measures. Taxes have been raised in an effort to curtail borrowing, and interest rates are being increased to mitigate inflation.
Nevertheless, returning to economic orthodoxy comes with its own set of consequences, as the UK is about to discover. The previous all-action approach resulted in unintended side effects, such as soaring asset prices and subsequent inflationary pressures. The brief tenure of Liz Truss as Prime Minister tarnished the reputation of economic experimentation, emphasizing the distinction between managing an economy and competing in sports like cricket, which do not face constant scrutiny from the global financial markets.
Reverting to established economic practices has its downsides. One challenge is the public’s dissatisfaction with this return to orthodoxy, which Rishi Sunak may experience during the upcoming by-elections. Another challenge lies in containing the unconventional ideas that have gained momentum due to the necessity of implementing drastic measures during the global financial crisis and the pandemic. Heterodox thinking, including concepts like modern monetary theory and the Green New Deal, has emerged as a result.
Moreover, the UK will face its own set of repercussions as it embraces economic orthodoxy once again. The economy, after stagnating for over a year amid rising borrowing costs, is now on the path to recession.
Sluggishness hauls centre-point to critics
Policymakers, particularly central banks, are being criticised for their perceived sluggishness in responding to the threat of inflation, which is now feared to be deeply embedded. To combat this, interest rates will need to remain higher for a longer period to eradicate inflation and restore central banks’ credibility.
To some extent, the criticism aimed at central banks is valid. Interest rate setting was entrusted to them because, as experts, they were expected to possess the ability to anticipate the future. The fact that they failed in doing so is a justified cause for concern.
However, the situation looked significantly different when almost all Covid-19 lockdown restrictions were lifted two years ago this week. At that time, the annual inflation rate stood at 2%, the Bank of England maintained an official interest rate of 0.1%, and there were concerns that the termination of the furlough scheme would lead to a sharp rise in unemployment.
With the benefit of hindsight, it is evident that central banks and finance ministries took a risk with inflation by stimulating demand during the pandemic while the supply of goods and services was constrained. However, only a minority of individuals recognised these risks, and even when they were acknowledged, they were deemed worth taking. The prevailing opinion was that policymakers had made the right decision to act and that withdrawing policy support prematurely could be detrimental.
In mid-2021, few people, apart from staunch monetarists, could have foreseen that inflation would reach its highest level in four decades, peaking at 11.1% by the end of 2022. Nor could they have predicted that the Bank of England would raise interest rates from 0.1% to 5% in 13 consecutive increments.
Impact of this downturn of Bangladesh and Bangladeshi Diasporas
Last month, the United Kingdom (UK) and Bangladesh have experienced a remarkable surge in trade volume, witnessing a total trade reaching a record £4.7 billion ($5.83 billion) in 2022, as revealed by the UK’s Department for Business and Trade.
This surge in trade represents a substantial increase of 50.4% compared to the previous year. The trade balance heavily favoured Bangladesh, primarily due to its thriving readymade garments (RMG) sector, which accounted for the majority of the trade. In 2022, there was a significant surge in the United Kingdom’s (UK) total imports from Bangladesh, experiencing a substantial increase of 54.0% to reach £3.8 billion. In parallel, UK exports to Bangladesh also witnessed a notable rise of 36.7%, reaching £897 million during the same period.
However, the current economic downturn in the UK could have implications for this situation. The economic downturn may lead to reduced consumer demand in the UK, affecting the import of goods from Bangladesh, including readymade garments. As consumers tighten their budgets and face financial uncertainties, the demand for non-essential items like clothing may decrease.
Furthermore, the economic downturn may impact the purchasing power of UK consumers, potentially leading to a decline in imports from Bangladesh. With a decrease in demand, the volume of trade between the two countries could be affected, potentially resulting in a decline in trade volume and a shift in the trade balance.
Additionally, the situation pertaining in the UK may also have implications for the export of goods from the UK to Bangladesh. As economic conditions worsen, businesses in the UK may face challenges in maintaining their export levels. This could impact the overall trade relationship between the UK and Bangladesh, potentially leading to a decrease in export volumes.
While the effects of this downturn have been felt across the native population in UK, there are particular implications for the Bangladesh diaspora staying there.
One significant impact of economic crises is the increased risk factors for poor mental health. Factors such as poverty, low household income, debt, financial difficulties, poor housing, unemployment, and job insecurity all contribute to this risk. Evidence from previous economic downturns suggests that the UK recession may lead to higher rates of mental health problems and lower levels of well-being, exacerbating existing inequalities within the population, including the diasporas staying there.
Unemployment is strongly linked to poorer mental health, with psychological effects such as stigma, isolation, and loss of self-worth contributing to these negative outcomes. Long-term unemployment poses an even higher risk of poor mental health compared to being employed, which can affect the Bangladeshis staying there hard.
The economic downturn also impacts those still employed but facing job insecurity, increased work demands, financial problems, and lack of control over their work situation. Personal debt is another issue exacerbated by economic downturns. If the Bangladeshis working there grapple with the increased price of their daily need, they will fall themselves to the hole of debt, and that can eventually lead these people to more stressful situation.
