The British economy is running out of places to look for a good news story as it continues to struggle with inflation, while its neighbors in Europe lag behind rising prices. Now it is likely to impact the country’s growth prospects.
The Organization for Economic Co-operation and Development (OECD) published its latest forecast for developed countries on Thursday, and it didn’t make pleasant reading for Britain
The country was one of the few to have its prospects downgraded by the organization. Growth is now expected to be 0.4% instead of 0.7% previously.
Although the UK economy is still expected to grow faster than Germany, which is expected to grow by just 0.2% this year, Britain is losing more ground to the Eurozone, which expects a combined growth of 0.7% in 2024 .
It’s the latest worrying figure for Britain, which is struggling to shake off high inflation and is still feeling the effects of reputational damage from the 2022 budget crisis.
According to Jens Eisenschmidt, Morgan Stanley’s chief economist for Europe, this has at least led analysts to find an easy way to summarize the embattled nation.
“Think of Europe, but everything a little worse,” is how Eisenschmidt describes Britain’s current economic status.
It’s a sentiment echoed in the OECD’s latest outlook, and one that’s troubling policymakers in the country.
Britain’s central bank, the Bank of England, is expected to be slower than the European Central Bank (ECB) in cutting interest rates to boost growth, Eisenschmidt says.
Britain faces more persistent inflation than its European counterparts. In April, eurozone prices rose 2.4%, while in March the UK CPI rate stood at 3.4%, accelerating the former’s path to rate cuts.
Eisenschmidt said the source of this more persistent inflation was up for debate. However, the blame could be placed on a growing unemployment crisis in Britain
Economic inactivity in the country has soared, accelerated by a growing trend of long-term absenteeism and youth unemployment.
The country has not been able to take advantage of migration flows to compensate for the tight labor market, unlike the European Union’s common market.
As a small open economy, Britain is also more vulnerable than the EU to capital flight due to market shocks, as summarized in the September 2022 hammer budget.
Eisenschmidt said these pressures left Britain “more exposed to the need for domestic discipline” in the short term.
The outcome of this year’s British general election, the date of which is not yet known, is another key short-term variable affecting the fate of the economy.
Aging population
A trend of labor market flows having an outsized impact on economic performance is one that Britain must get used to.
Eisenschmidt said developed European countries share a common threat of an aging population. As demographics age, developed economies are expected to experience labor shortages, exacerbated by the need for workers to care for older citizens.
As Eisenschmidt notes, countries will become increasingly dependent on immigration from younger countries to fill gaps in the labor market.
However, in recent years Britain has developed a reputation for being inward-looking. The country voted to leave the European Union in 2016 in a debate that focused heavily on immigration levels from elsewhere in the EU.
Domestically, a crucible issue in recent months has been the government’s controversial plan to deport asylum seekers to Rwanda.
Despite this, overall immigration to Britain has continued to rise since the UK Brexit referendum. However, net migration has fallen as more people left the country after the elections.
One bright spot for the country, however, is that despite its own attitude to immigration, Britain still appears to be one of the best places for foreign residents, according to Eisenschmidt.
“A key measure of long-term success or reduced relative decline is your ability to attract migrants and integrate them into the workforce.
“I would say that from my perspective, Britain doesn’t score that badly simply because of the language and the great educational institutions that have great brand value out there.”