The world’s fifth-largest economy is reeling from high inflation, slow growth and deteriorating trade relations with the EU.
British Prime Minister Boris Johnson announced his resignation on July 7 after dozens of cabinet members withdrew in protest at his personal scandals and leadership style. Johnson’s reputation is also seriously affected by high inflation, slow growth, a cost-of-living crisis that threatens millions of people this winter and the risk of a trade war with the European Union (EU). ).
UK stocks rose yesterday after news that Mr Johnson was about to step down. The pound also strengthened, gaining 0.75% against the USD, leaving the 2-year low reached earlier this week.
“The pound will remain weak due to the gloomy economic situation in the UK. The UK is still lagging other countries and is likely to fall into recession,” said Walid Koudmani, market strategist at stockbroker XTB. specified in a customer report this week.
Whoever replaces Boris Johnson to lead the Conservatives and Britain will face very serious economic and financial challenges.
The highest inflation in the G7 group
All major economies in the world are suffering from the impact of broken supply chains during the pandemic, energy and food price shocks due to the Russia-Ukraine conflict. However, the UK suffered the heaviest losses compared to other countries at the same level of development.
Inflation here reached a 40-year high , touching 9.1% in May. This is the highest figure in the G7 group. UK inflation is forecast to rise to 11% this year, despite several interest rate hikes.
The spillover from Brexit – Johnson’s most prominent achievement of his term – has exacerbated labor shortages and increased the cost of doing business. Import costs are also pushed up due to the weak pound this year.
Rising fuel and food prices are plunging Britain into its worst cost of living crisis in decades. This forces low-income families to choose between the need for “heating and eating”. Many activists have voiced their demands for increased government support.
Mr Johnson’s government has pledged £400 ($502) per family to help millions pay their energy bills. Under great pressure, they also announced taxes on the unusually high profits of oil and gas companies.
However, these efforts are like salt in the water. Disposable income of Britons this year could be the second biggest drop in history, according to the Bank of England. The main reason is the cost of energy and food.
The average household’s energy bill could rise by 50% to £3,000 this winter. The British standard of living is also falling. The Resolution Foundation this week said British wages are not higher now than they were before the 2008 financial crisis.
However, Reuters believes that Mr Johnson’s replacement is unlikely to do much to offset the impact of soaring food and energy prices globally.
If economic growth does not pick up, people’s income will hardly improve. And this prospect is not feasible in the short term. Around the world, the speed of recovery is also being dragged down, but the UK is particularly hard hit, CNN said.
The world’s fifth-largest economy barely grew in February and began to contract in March. The decline accelerated in April, with GDP falling by 0.3%. The three big sectors of the economy – services, manufacturing, construction – are all going backwards, according to the UK Office for National Statistics. Retail sales in May also fell for two consecutive months.
The negative news is forecasted to not stop. In a financial report released earlier this week, the Bank of England said the outlook for the economy was “seriously deteriorating”.
The Organization for Economic Co-operation and Development (OECD) last month forecast that the UK economy is heading towards stagnation (high inflation accompanied by slow growth). Next year’s GDP is forecast to stand still – the worst in the G7 group of countries.
Slow growth is bad news for government debt, which now equals more than 90% of GDP. The UK government debt has increased due to measures to support businesses and people to cope with the pandemic and the energy crisis.
Combined with pressure from an aging population, Britain’s public debt “is currently unsustainable and is forecast to exceed 250% of GDP in the long-term”, the Office for the National Budget (OBR) said. This also means that the next prime minister has less room to cut taxes or increase public spending aggressively.
“All of this is a challenge for future governments to steer the economy and public finances in the years to come,” OBR said.
Post-Brexit promises unfulfilled
Unlike his predecessor – Theresa May, Mr. Johnson successfully helped Britain to leave the EU . However, trade with Europe has not yet exploded as he promised. In fact, the OBR in March said the UK also missed the recovery of global trade during the pandemic.
For many businesses, the free trade agreement Mr Johnson signed with EU leaders nearly two years ago has only increased their paperwork, made exporting more difficult and import costs higher. Agreements signed with other countries have had little to no effect.
“Trade with other countries could have offset the decline in trade with the EU, but neither agreement is large enough to change our forecast,” the OBR said.
Official data released last week showed that the UK’s balance of payments deficit rose to 8.3% of GDP in the first quarter. Besides, the pound this year fell sharply.
The relationship between Johnson and EU leaders is also not very good. He once threatened to not comply with part of the Brexit deal. This sparked speculation that the UK-EU trade war would happen, causing Britain to suffer more damage.
“With the appearance of potential names to replace Johnson, the UK’s relationship with the EU will be less tense. Even if that person has a pro-Brexit position, it is unlikely that relations will improve much, but overall the situation will be calmer,” said Kallum Pickering, an analyst at Berenberg.