As the pandemic fades, the U.K. must confront the fundamental challenges it was facing prior to 2020. Pre-COVID scarcities and policy complications will return to the fore.
Inflation rose by more in Britain than it did in other countries, and its descent has been more gradual.
Supply shocks explain the difference: the U.K. is more reliant on food supplies from Eastern Europe, and faces labor shortages that date from the declaration of Brexit. An incomplete network of trade agreements and weakness in the pound have raised import prices.
The British economy has weathered these challenges so far. But prospects for growth remain muted, and downside risks are elevated. U.K. consumers have been squeezed by outsized increases to food and energy prices. The rising costs of mortgages have also been a burden on homeowners whose loans have reached their terms. Falling house prices are reducing household wealth.
The U.K. has a long and proud history of working through intervals of uncertainty and hostility.
The U.K. labor market has remained strong enough to carry on through this difficult interval. Unemployment has risen only slightly and wage increases have accelerated to keep pace with rising costs of living. Strikes have proliferated, producing generous settlements for unions.
The Bank of England (BoE) has shown its resolve to contain inflation with rapid rate hikes. Recent monetary policy decisions have been contentious, suggesting that peak rates are in sight. Cuts are a long way off; the BoE will need to see inflation make much more downward progress before relenting. A wage-price spiral looms if labor markets do not loosen, which would prove especially challenging to arrest.
Policymakers have few good options to break the nation out of malaise. The budget crisis of late 2022 serves as a cautionary tale for those favoring fiscal stimulus. The current government is not a strong one, and faces elections sometime before January 2025. But even a new leader with a fresh mandate will struggle to unlock growth. Structural challenges, many of them stemming from the Brexit vote seven years ago, remain a hindrance.
The U.K. has a long history of working successfully through intervals of uncertainty. That spirit will be drawn upon heavily in 2024.
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