TThe UK is sliding into recession. A strong recovery was expected just six months ago, but the impact of the pandemic, the slow return to pre-Covid work patterns and rising inflation following the invasion of Ukraine have weighed on the economy.
Last week, Bank of England governor Andrew Bailey warned that Britons are likely to experience a deeper and longer downturn than other major industrialized nations. He also said inflation would be more severe and persistent.
Unique to the UK experience is Brexit, which has imposed additional costs and restrictions on exporters to the EU and limited the supply of skilled labour. And after 10 years of austerity, government-funded organizations have entered the pandemic in a weak position and are now in an even worse shape as they grapple with the skyrocketing cost of living and a shortage of workers.
But these are not the only reasons why the situation in the UK is so particularly bad. These charts illustrate the many overlapping issues holding the country back:
Millions of people in the top two-thirds of the income ladder saved money during the pandemic — as opportunities to travel, eat out and shop were severely limited. With around £260 billion in bank accounts, it was reasonable to expect the recovery to see an explosion in demand.
As restrictions eased, employers appealed to employees to meet that increased demand in restaurants, stores and more. However, many self-employed and elderly people who have stopped working during the pandemic have remained on the sidelines – unwilling to apply, or unable due to illness.
The most recent job data, for the three months to April, shows that job openings have reached a new high of 1.3 million and unemployment is at a 40-year low.
According to the Institute for Employment Studies (IES), there are about a million fewer people in the job market now than before the pandemic. Three quarters of this can be explained by the elderly and people with long-term health problems leaving the labor market; the rest can be attributed to the lack of EU workers after Brexit.
Wage levels don’t help pull people back into the workplace. Adjusted for inflation, wages fell 4.5% in the year to April, the biggest drop since comparable records began in 2001. Tony Wilson, head of the IES, said: “The labor market continues to see a toxic combination of declining real working conditions, high unemployment and labor shortages.”
Meanwhile, the government has halted its pandemic-related apprenticeship schemes, leaving only the much-maligned apprenticeship tax, which many employers say is bureaucratic and costly.
Brexit hit for trade
There is little doubt, 18 months after the UK left the single market and customs union, that UK trade has suffered significant and ongoing damage. A report by the Center for Economic Policy Research (CEPR) and the UK in a Think Tank in a Changing Europe found that the “desire to pursue a ‘hard’ Brexit had led to a large increase in trade barriers and trade costs in goods and services, as well as new restrictions on migratory flows”.
In an overview of the years since the referendum in 2016, it said the areas most voted to leave the EU have been hardest hit, especially since the post-exit trade deal came into effect in January 2021.
“It caused a major shock to trade between the UK and the EU, with a sudden and sustained 25% drop in UK imports from the EU compared to the rest of the world,” the report said, adding that the costs have risen in some sectors. “It is estimated that food prices will increase by 6% in the two years to the end of 2021 as a result of Brexit.”
And while exports have not fallen, exporters have not been able to take advantage of the revival in world trade over the past year. A separate study by the London School of Economics found that Brexit “has reduced Britain’s open and competitive economy more broadly, which will reduce productivity and wages over the next decade”.
Since 2019, Britain has experienced an eight percentage point drop in trade openness – the sum of its exports and imports as a share of GDP. France, which has a similar trade profile to the UK, experienced a much smaller decline over the same period – two percentage points. “This decline is not explained by changes in the pattern of world trade during the pandemic,” the report said. “The UK also lost market share in 2021 in three of its largest non-EU goods import markets: the US, Canada and Japan.”
Productivity and investment
The productivity of the UK has lagged behind that of Europe, the US and Japan for decades. Measured by the value produced by a worker every hour, British productivity is estimated to be about 20% lower than France and Germany and 30% lower than the US.
Official data estimates that UK business investment is now 9.1% below pre-pandemic levels, after falling 0.5% in the first three months of 2022. The situation was made much worse by Brexit, according to a Bank of England survey last year found that the leave decision “has cut investment levels by nearly 25% in 2020-21”. The Bank said the impact “has gradually increased over the past five years, and at least until the start of the Covid pandemic may largely explain why there has been no growth in investment since the EU referendum”.
Most of the drop was due to Brexit-related uncertainty, which is likely to persist as the government argues over the Northern Ireland protocol and many unresolved disputes over border controls.
Broken supply chains
The UK economy is one of the most open in the developed world. Trade accounts for about a third of the national income and 50% of Britain’s food is imported. So the devastation wrought by global supply chains by the pandemic and by Covid lockdowns at factories in East Asia has hit the country hard.
Since the fall of 2020, the ONS has been tracking shoppers’ opinions on the availability and choice of items in supermarkets and stores. The numbers show a decline last fall as Christmas supplies dwindled on everything from toys to turkeys.
Even when a final product was made in the UK, most of its components were in most cases imported and suffered long delays in delivery. Poultry, for example, is heavily dependent on imported feed, but last year’s supply problems were also the result of seasonal shortages due to Brexit.
Since then, most people have told pollsters that they are happy with what the stores have to offer; it’s prices they struggle with.
Outside of supermarkets, businesses and consumers are reporting many shortages, such as waiting four to six months for construction materials to be imported, while global demand for stone, concrete and wood is soaring.
Vladimir Putin’s war has also hit certain goods hard. Cooking oil has been hit hard because of the key role that sunflower fields in both Ukraine and Russia play in supplying the global market.
The government said it wanted to fund a renaissance of arts and cultural activities in the north and west of England as part of its leveling agenda. As we came out of the third lockdown, Culture Secretary Nadine Dorries proposed cutting 15% of the Arts Council budget for London-based organizations in favor of those in areas designated for leveling.
She was immediately charged with “levelling” by Labor and leading art figures, with the National Theater pointing out that it is a traveling company and such productions would be affected.
The financing of art and culture at the municipal level is characterized by large-scale cutbacks. Spending has fallen more than 30% since a peak in 2009 and there is no sign of an increase for now.
A growth area since 2009, museums lost millions of visitors during the pandemic. In 2018-2019, visitor numbers were waived in many locations – with the exception of special exhibitions – but now they are almost half of the previous level.
Industry leaders say schedule cuts, both buses and trains, and chaos in the airline industry are deterring domestic and foreign visitors and delaying recovery for months, if not years.
Cuts in science funding
In March, the British research and innovation agency (UKRI), which manages science funding in Britain, told universities that the budget for international development projects had been cut from £245 million to £125 million.
Bob Ward, policy director of the Grantham Research Institute on Climate Change and the Environment, said halving the budget undermined the chancellor’s promise to make the UK a “scientific superpower”†
Academics are frustrated that £250m in funding from the European Horizon programme, a research behemoth that has funded some of the latest medical and scientific breakthroughs, has stranded in a row over Northern Ireland’s protocol. Without access to Horizon research, the UK will go into second division, science experts warn.
In defense of Rishi Sunak, he has committed to spending 2.4% of its GDP on research and development in the UK, up from 1.74% last year. France already spends 2.2% of GDP, the US 3.1% and Germany 3.2%. The chancellor initially wanted to achieve this before 2025, but got cold feet and pushed the date back to 2027.
There have been steady increases over 30 years, but the plan includes an increase from £9 billion in public money in 2017 to £22 billion in five years, which seems like a high demand. Like so many aspects of government spending right now, the plans are lagging behind and need to be massively increased in recent years to reach the target.
UK vs G7 growth
The poor health of the UK economy was largely disguised during the pandemic by government spending on health and Covid-related recovery programs. With much of this being withdrawn, the country’s growth rate will depend much more on the private sector.
The International Monetary Fund says the UK will sink to the bottom of the G7 competition next year, in part as government spending is slashed. Growth will decline to 1.2%, lower than expected growth rates in France, Germany, the US, Italy, Japan and Canada.
Accounting firm ICAEW says it’s fairer to factor in average growth since 2020, putting the UK ahead of Italy and Japan. However, both countries have declining populations and do not need the same level of national income growth to improve individual living standards.