Why does the UK economy lag behind that of the US, Germany, and other countries?

By Lucy Hooker, edited by News Gate Team

People in the UK are feeling the effects of the faltering economy in their wallets as earnings are unable to keep up with growing prices.

The UK economy will contract this year, according to the International Monetary Fund (IMF), whereas every other major economy will rise.

The Bank of England predicts that the UK will experience a recession in 2023, albeit one that is milder and shorter than anticipated.

Given the epidemic, the conflict in Ukraine, and the rising prices of both food and energy, it’s possible that the gloomy future is not unexpected.

But why does it seem that the UK is doing worse than other wealthy nations like the US, Germany, and France?

The UK appears to be falling behind.
Predictions are never accurate. Predictions invariably fall short because there are so many variables – from weather to geopolitics – that influence economic growth. They can, however, provide a direction.

And the available data indicates that other nations have been affected by the enormous challenges of recent years less severely than the UK has.

According to data from the Organisation for Economic Cooperation and Development (OECD), which assesses the performance of wealthy nations, the UK economy contracted more than any other during the first few months of the pandemic.

Once the economy started to recover, the UK recovered quickly, but not quickly enough to make up for lost time.

Nevertheless, the gap between the UK and other countries might not be as wide as it seems.

That’s because most nations gauge the effectiveness of their public services, like health and education, primarily on their expenditures, like the salary of a nurse, for instance. In the UK, they are accounted for in a different way by assigning a value to the services rendered, such as hospital operations.

As a result, the UK’s statistics more accurately represent the effects of strike-related disruption, closed schools, and cancelled activities during Covid.

The wider picture, though, is still present: the UK economy is predicted to contract this year by both the Bank of England and the IMF, while other G7 nations are predicted to increase.

Is Brexit solely to blame?
The cost of Brexit is uncertain, but according to a Bloomberg estimate, the UK economy is losing nearly £100 billion a year and is 4% smaller than it may have been if the UK had stayed in the EU.

Carl Emmerson, deputy head of the independent think tank Center for Fiscal Studies, asserts that “the EU is a very rich region of the world.” And we’ve made trading with that group of nations much more challenging, for better or worse, so it will undoubtedly make it more difficult for the UK economy to expand.

How has Brexit affected the UK economy?
He claims that another “strain on growth” after the referendum decision in 2016 is the stagnation of business investment. According to a Bank of England policymaker, Brexit cost the UK’s investments £29 billion.

The ability of EU workers to freely enter the UK to work has been restricted, making it difficult for the hospitality, agricultural, and care sectors to fill open positions.

As a fellow at the Institute of Economic Affairs, a free market think group, Julian Jessop describes himself as a “Brexit optimist.” Although he acknowledges that there have been immediate economic consequences, he thinks that leaving the EU has significant potential benefits.

The disadvantages are still predominate because we are still in a transitional moment, he claims.

Nonetheless, he asserts that these drawbacks are “smaller than many have been arguing” and “more likely to be temporary,” as many of them relate to uncertainty and the adjustment process.

What additional factors are at play?
Energy prices

The impact of Russia’s invasion of Ukraine differs amongst nations, but oil prices worldwide shot up as a result.

According to Mr. Emmerson, some European nations have more diverse energy sources than the US, which has its own internal reserves of fossil fuels. France, for instance, has a sizable nuclear infrastructure, and Norway has a sizable hydroelectric resource.

He claims that “Britain is pretty vulnerable.”

Also, the cost of gas, the priciest method of producing power, is the basis for how energy is priced in the UK. According to Mr. Jessop, this led to price increases throughout the economy and a worsening of inflation.

Personnel shortages

During the pandemic, the workforce shrank in the majority of economies.

Nonetheless, the UK remains an anomaly, with statistics failing to recover following the crisis.

Prolonged issues
The UK’s poorer performance has other, more fundamental causes, says Diane Coyle, a Cambridge University economist.

Although the economy has slowed since the 2008 financial crisis, she contends that the causes of the issues are far older, with investment falling down since the 1990s.

This left the economy unable to withstand the triple shocks of Covid, Brexit, and the Ukrainian War.

“That’s due to long-term weaknesses, long-term underinvestment, [and] degradation of public services and infrastructure, which are just needed if the economy is going to expand,” she claims.

The UK economy, according to the government, is robust.

Chancellor Jeremy Hunt responded to data revealing that the UK narrowly escaped a recession in 2022 by saying the data indicated “underlying resilience” but adding that the economy was “not out of the woods.”

By Lucy Hooker, edited by News Gate Team

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