A difficult year ahead for the global economy is set to hit some countries harder than others.
With 2023 upon us, many bankers, economists, and business leaders have cautioned to brace for a global economic contraction that will send many countries plunging into a recession. As much as one-third of the global economy could enter recession territory this year, IMF director Kristalina Georgieva said over the weekend, warning of a “tough year” ahead for the world.
Georgieva said simultaneous contractions in three major economies—the U.S., the EU, and China—will be the driving forces behind a global recession, as wealthy nations will be unable to escape economic slowdowns.
U.K. in trouble
But with the lingering effects of the pandemic and the Ukraine war continuing to drag down growth for the rest of 2023, some developed countries are set to fare far worse than others.
The U.K. is facing a “deeper and more prolonged recession” than any nation in the G7, a global policy forum representing seven of the world’s most advanced economies, as around four-fifths of economists say the U.K. will be burdened by a much longer recession than its peers, according to a Financial Times survey released Monday.
The FT polled 101 U.K.-based economists on the economic outlook for the country compared with other G7 countries, finding that a “clear majority” of economists surveyed believed the U.K. is in for a much more severe economic contraction that will take longer to recover from.
Economists agreed persistently high inflation, a shrinking workforce, declining trade relations with the EU, and a high exposure to the energy crisis sparked by the Ukraine war were the leading factors behind the U.K.’s comparatively grim prospects.
“The U.K. suffers from an energy shock as bad as Europe’s, an inflation problem…as bad as the U.S., and a unique problem of lack of labor supply from the combination of Brexit and the NHS crisis,” Ricardo Reis, a polled economist and professor at the London School of Economics, said in the survey.
A tough year ahead
Economists surveyed predicted a return to normal by 2024 when inflation begins to dissipate, but the rest of this year will likely be a long slog for the U.K. economy.
The brunt of the burden will likely fall on consumers as inflation rages while borrowing costs increase in tandem with the Bank of England raising interest rates, the survey found. Words used by economists to describe the consumer outlook for the next year ranged from “terrible” to “miserable.”
Annual inflation in the U.K. came in at 10.7% last month, and like many countries the U.K. central bank resorted to a series of interest rate hikes last year to bring prices down.
The Bank of England hiked rates again at its last meeting of 2022 in December, indicating it was prepared to “respond forcefully” with more hikes if inflation showed signs of persisting in 2023.
Economists surveyed by the FT said inflation could stay uncomfortably elevated in the form of high energy prices this year due to the Ukraine war’s aftershocks.
Vladimir Putin has punished Western sanctions by severely limiting Europe’s access to Russian natural gas, which sent energy prices soaring last year. The supply squeeze has sparked an energy crisis on U.K. shores, given the country relies on natural gas for 40% of its electricity generation and 84% of its heating, and unlike the EU has a very limited gas storage capacity to fall back on during times of high energy demand.
The country’s inflation problem has been compounded by its shrinking labor force, which over the past few years has seen record numbers of workers drop out, primarily due to long-term illnesses and mental health issues.
The number of workers who had retreated from the labor force because of sickness increased by 500,000 between 2019 and November 2022, according to the Office for National Statistics.
The shrinking labor force has taken a toll on public services in the U.K. too. The country’s social care workforce fell by 50,000 people last year due to wage disputes and illnesses, the first decline in a decade.
High inflation and a shrinking labor force are expected to exacerbate a U.K. recession this year, but it isn’t the first time the country’s economy has fallen behind that of its G7 peers.
During the early days of the pandemic in 2020, when much of the world entered a steep albeit short recession, the U.K. economic contraction was the most severe among the G7. Economists tied the sharp slowdown to the U.K.’s delayed decision to impose lockdowns, which contributed to the highest number of COVID-related excess deaths in Europe.
Since the pandemic, economic recovery in the U.K. has also been slow compared to other wealthy nations.
The U.K. was the only G7 country last year with an economy smaller than what it was before the pandemic, according to official figures from the ONS released in September, as high inflation and interest rates dealt a much bigger blow to economic growth than in other developed nations.
The FT survey’s findings of the next recession’s severity in the U.K. add to a similar forecast last year from the OECD, an intergovernmental organization fostering world trade and economic growth.
The U.K. is expected to see the largest economic contraction among wealthy nations due to the Ukraine war and the energy crisis, the body predicted in its latest economic outlook published in November.
Our new weekly Impact Report newsletter examines how ESG news and trends are shaping the roles and responsibilities of today’s executives. Subscribe here.