The UK economy is in turmoil, but there are signs of hope

T.Queen Elizabeth II’s death and the national mourning period that followed were the latest blow to the already struggling British economy, but economists and analysts say there are glimmers of hope.

Britain is at a turning point. The country has just completed a 10-day mourning period, culminating in closures across the country on a public holiday to mark the late monarch’s funeral. His death came just two days after a new prime minister, Liz Truss, took office, after the latter was ousted from his own party for inappropriate behavior, as the UK faces a crisis in the cost of life unlike anything the nation has ever seen in decades. Inflation has risen to its highest levels since the 1980s, around 10%, and the nation is facing an energy crisis due to decreasing Russian energy exports to Europe. The British pound languished around a nearly 37-year low against the dollar. And economic growth: The UK is now lagging behind India, a former British colony, becoming the sixth largest economy in the world, and its central bank, the Bank of England, has warned it risks falling into a recession that could last until 2024.

The death of Queen Elizabeth II is the last thing to touch Britain’s psyche. Although the monarchy is often seen as an anachronism, it is still an important part of UK life. It is likely that she will continue under the new monarch, King Charles III, who joined when the queen died.

“It really looks like we have entered a new era for the UK as a whole,” says Craig Erlam, senior market analyst at multi-asset broker OANDA. “This makes it a very interesting time for the country and its place in the world.”

In many ways, the monarch has a symbolic, not a political, role. This means the change shouldn’t be too controversial, Erlam says. However, it is a difficult act to follow. “He was an incredibly loved figure,” he says. “I just wonder if there is the same love and devotion for King Charles.”

Britain’s growing economic pressures

When economic growth for the third quarter is released, it could show that the holiday of Queen Elizabeth II’s funeral on Sept. 19 depressed economic growth slightly, pushing the economy into a technical recession of two consecutive quarters of negative growth, he says. Steve Clayton, Head of Equity Funds at UK-based Hargreaves Lansdown. This is due to lower productivity and economic production. A similar thing happened in the second quarter when an additional vacation was granted to celebrate the Queen’s Platinum Jubilee and the economy shrank by 0.1%, according to data provider Trading Economics. “Whatever impact there will be, it will be temporary,” he says. That’s because it likely won’t change any spending on cars, TV, food and other things, he says. Additionally, some food banks have planned to close on the day of the funeral, which means those in dire need may not have been able to obtain the basic necessities.

This is not to say that spending habits have not changed. Clayton noted a contraction in consumer spending, likely caused by the country’s energy crisis and recent interest rate hikes. UK food delivery retailer Ocado, popular with British middle-class consumers, recently reported that its customers were spending less, swooping the company’s stock. Clayton says it’s also partly the harsh reality of higher home loan costs.

Many homebuyers use adjustable rate mortgages to purchase properties. The Bank of England raised its benchmark lending rate to 1.5% from 0.35% last November. This will have a direct impact on many UK residents with adjustable mortgages. Worse still, the central bank raised rates by 0.5% today, its seventh consecutive hike, slashing the household budgets of many Brits. “It will be painful for those with large, flexible-rate mortgages,” Clayton says.

Then there is the energy crisis, which threatens to plunge half of families into energy poverty. The cost of natural gas in Europe has more than tripled recently to 217 euros ($ 217) per kilowatt hour from around 70 euros a year ago, according to data from Trading Economics. The surge occurred because Russia cut off natural gas deliveries to Europe following the invasion of Ukraine. That price jump translates directly into an increase in electricity prices and heating costs.

Earlier this summer, Brits were warned that energy bills could exceed £ 6,000 per year ($ 6,960) by April 2023, due to higher heating costs this winter. This is close to 20% of the median annual household income of £ 31,500 after tax, according to government statistics. Some people won’t have the money to pay their bills, experts say.

According to a financial research firm Red Flag Alert, more than one in five UK companies with sales in excess of £ 1 million ($ 1.16 million), around 76,000, could face insolvency due to higher energy bills. high. Those with high energy consumption, such as industrial companies, are most at risk.

Liz Truss’s emergency economic relief plans

Two days after becoming Prime Minister, Truss announced a cap on household energy bills at an annual rate of around £ 2,500 for the next two years, with the government paying the difference. The government also unveiled a £ 40 billion ($ 45 billion) plan to help businesses by capping wholesale energy prices for businesses for six months. Some have criticized such measures as filling the coffers of energy companies that are expected to make bumper profits due to rising energy costs.

The new UK Chancellor of the Exchequer, Kwasi Kwarteng, will announce the government’s urgent plan to tackle the cost of living crisis on 23 September. The emergency tax event was planned earlier but was suspended while Parliament was suspended for the mourning period. The so-called “mini budget” should include tax breaks for companies and individuals and unnecessary regulatory reductions.

“One of the most compelling stories is the UK’s economic policy mix,” says Marc Chandler, managing director of Bannockburn Global Forex. In particular, this means accommodative fiscal policy (more expenses, lower taxes) and restrictive monetary policy, with higher interest rates. This was the US policy used in the early 1980s, which led to a period of stellar growth.

Chandler also thinks the policy mix will help in part to solve the country’s other problem: the decline in the value of the pound, which recently hit its lowest level since the mid-1980s. He says the drop in the pound is largely due to the outrageous strength of the dollar. Other rich country currencies fell by similar amounts, notably the single European currency, the euro and the Japanese yen. The pound has rarely been undervalued as it is now, Chandler says, and he expects it could start bouncing once the dollar peaks, which he believes will be in early 2023.

Truss also wants to ensure a future of stable energy supplies, says Ivo Pezzuto, professor of global economics and digital transformation at the International School of Management in Paris. Higher prices lead to lower demand, but that doesn’t solve the fact that the Kremlin cutting off natural gas deliveries is a supply problem in Europe. “They need more supplies,” he says. Gone are the days of building an economy around cheap Russian oil and gas.

Unlike the rest of Europe, the truss plan does not mean imposing taxes on unexpected profits on energy companies. He wants to encourage more drilling and has lifted the ban on hydraulic fracturing of oil drilling or fracking. There are also discussions on establishing a robust energy policy that embraces new technologies, including nuclear and renewable energy. “It will take some time for the benefits to arrive,” says Pezzuto.

There are other signs of hope for the economy. The unemployment rate, at 3.6%, is the lowest since the 1970s. There are now 1.3 million vacancies against 1.5 million unemployed. Put simply, the labor market is rigid, which gives employees the power to demand higher wages, which in turn will help offset the rising cost of living. “Employers are unlikely to keep wages low for long,” Clayton says.

But there is a caveat to rising salaries. If wages call for excessive inflation, the Bank of England may worry about sustained inflation. The result could be an aggressive rise in interest rates, says Konstantinos Venetis, director of Global Macro at London-based financial firm TS Lombard. If that happens, the economy could take a hit.

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