- By Dharshini David
- Global Trade Correspondent, BBC News
2 hours ago
Image source: Getty Images
Inflation is still higher in the UK than in many other rich countries, so interest rates may stay higher for longer.
So how does the UK fare in other areas of our economic well-being? When growth, jobs and taxes are taken into account, the picture is mixed.
For all the talk of lower inflation, this still means UK prices are a painful 7.9% higher than a year ago. In the EU this rate is 5.5%, in the US it is even lower at 3%.
Britain experienced the two worst causes of price shocks hitting rich countries – last year’s surge in energy and food costs triggered by the war in Ukraine and post-pandemic labor shortages.
Like the EU, the UK buys a lot of energy – but the impact of the fall in wholesale gas prices is taking some time to show up in our inflation figures
This is due to the later introduction of the energy subsidy and it takes a while for price movements to be reflected in the cap on domestic bills.
But so-called “core inflation,” a measure that disregards energy and food, remains near its highest level in 30 years. This suggests there is still heavy spending on non-essentials and goodies, with some people using savings saved during the pandemic or due to pay rises.
It’s this discretionary spending that the Bank of England is targeting when it raises the cost of borrowing.
But we are not alone. In many other countries, interest rates on new mortgage deals have skyrocketed over the past 18 months.
However, the effects are different. In the United States and some parts of Europe, fixed-rate mortgage contracts typically have terms of 25 or 30 years. In some cases, mortgage holders can switch deals with minimal penalties. The French government is also effectively capping interest rates, so a new 30-year mortgage contract can cost 3.5%. In America, these mortgage rates are close to 7%.
It’s more meaningful to compare effective interest rates – the average between existing and new home loans. According to the latest published calculations, it is just under 3% in the UK, where most loans are on two- or five-year fixed terms (although this figure will increase as more loans are re-termed). In France and Germany it is below 2%
Although inflation has slowed here, the Bank of England is expected to hike rates at least once more – and they could stay high longer than in the EU or the US.
When it comes to growth, Chancellor Jeremy Hunt would like to highlight that the UK has grown faster than France, Japan and Italy since 2010.
But many experts compare where the economies were before the pandemic. According to quarterly official figures, Germany and Great Britain were the only G7 countries in the spring of this year that still had smaller economies than at the end of 2019.
Analysts think this may be due to UK consumers being more reluctant to increase spending due to the pandemic. International trade also recovered more slowly from this shock than in other large countries. This may be a result of changes in trade arrangements brought on by Brexit – and faltering investment.
In 2023, however, the UK was more resilient than some had anticipated.
Growth may have flattened, but consumer spending has held up better thanks to higher wages and pandemic savings. In fact, it was the euro zone that slipped into recession earlier this year.
However, higher interest rates result in a slowdown that takes time to be felt. Some economists now fear the UK could slip into recession – and others fear it too.
But we still have to catch up.
Despite the devastating effects of Covid and higher interest rates, our job market hasn’t fared too badly. The UK unemployment rate is 4% lower than the EU, although higher than the US 3.6%.
But there is much more behind the picture.
To be considered unemployed, individuals must be available to work and seek employment. Those who are not present are considered inactive. The UK is rarely one of the few wealthy countries where there are more inactive people than before the pandemic, hundreds of thousands more, especially as the number of long-term sick people has soared. The OECD ranks the UK last in the G7 in terms of labor force participation rates (the proportion of people who are employed or looking for work).
If you add the Brexit restrictions, there are bottlenecks in some sectors. On the other hand, it could boost wage growth as workers can push through larger wage increases.
But if those interest rates rise, unemployment could rise as well.
It’s not just inflation and interest rates that affect wealth. Those earning wages or running businesses may have noticed higher tax burdens.
The share of our country’s income, GDP, paid to the helmsman is currently projected to reach a post-war record of 37.7% by 2028.
Do you feel slightly changed? Our so-called tax burden was actually lower than the EU average, albeit higher than the US according to the latest comparable figures. The helmsman in France already receives 45 cents for every euro that is generated there in the economy.
However, due to aging populations and existing debts, most countries will face increased pressure on their public coffers.
Overall it’s been a difficult couple of years but there are a few areas where the UK could feel particularly inferior.