By BO LEUNG in London |
China Daily Global |
Updated: 2022-06-24 10:52
Brexit, high inflation, soaring food prices and the Russia-Ukraine conflict have hit the United Kingdom hard compared with other economies in the developed world, and this may have an impact on its growth in the coming months, business experts and analysts said.
According to a report by the Organisation for Economic Co-operation and Development, global growth will sharply decelerate to around 3 percent this year and 2.8 percent in 2023, well below the recovery projected in the group’s previous Economic Outlook in December.
The experts said the UK has fared more poorly than other nations in the developed world, and growth forecasts next year are also likely to be affected.
Rising food prices pushed the UK’s consumer price inflation to a 40-year high of 9.1 percent last month, the highest rate out of the Group of Seven countries.
“In the UK, several factors are working together to slow down the economy,” said Gayle Allard, an associate professor of economics at the IE Business School in Spain. “One is Brexit, which has reduced trade volumes and levels of immigration. Both of these factors drive growth when they are strong and reduce it when they weaken.”
“The UK also suffered more than most countries from the pandemic. It is a large food importer, which has made the effect on inflation more severe and forced the Bank of England to raise interest rates even before the US central bank,” he added.
Impact of conflict
Allard said that as soon as the Russia-Ukraine conflict began, it became clear that Europe would be hit. This is partly due to its dependence on Russian energy, especially natural gas, and partly because of the geographical proximity of the conflict, which affected confidence and trade links.
Samir Dani, a professor of operations management and deputy director of Keele Business School in Staffordshire, England, said the world has been affected by the limited grain exports from Ukraine and Russia, and that has made food prices rise.
“The oil and gas ban out of Russia and blockades in Ukraine have affected the price of crude oil and energy prices, which then filters out to the UK economy, where energy prices and fuel prices go up. The rising energy costs then have an impact on the prices of everyday goods in the retail environment, which then escalates into people having less money to spend on other items and that brings the economy down,” he said.
Dani said the UK could be harder hit than the rest of Europe because many of the supply chains emanate from outside the UK, “and the price of the pound is fluctuating a lot at the moment, which also increases the cost of buying the goods”.
He said a combination of factors are hitting the British economy, including Brexit, which has created issues in supply chains coming into the UK, as well as struggles and hurdles encountered at the border between the UK and the EU.
As to whether being a eurozone member would make a difference, Allard, from the IE Business School, said not so much in the current economic climate.
“The euro is weak relative to the dollar, which helps exports in a zone that is a net exporter, and eurozone interest rates are very low, which should boost growth. Even as they rise, they are still at absolute levels that are extremely low. So eurozone membership is not a drag on growth,” she said.
“EU membership is what is more important, since they are facing …the energy crisis,” she said, adding that the EU’s attempt to wean itself off Russian energy will reduce European growth in the short term.
She also said that the EU’s Next Generation Recovery program, a plan to help the countries most affected by the pandemic in Europe, is disbursing funds this year, which should help growth.
Experts agree there is still a lot of uncertainty over the world economic outlook as the conflict in Ukraine continues. Looking ahead, Dani, of Keele Business School, said there will be upheavals in economic structures across the world.
“We have to think about the aspects of protectionism in the future, and work toward more cross-border collaborations in the next two to three years to manage the fallout from the Russia-Ukraine crisis. There will be a change in the structure of energy markets. I am sure the world is going to start looking closely at how energy supply chains flow across the world,” he said.
Allard added, “The fact that high energy and food prices are causing stagflation in the US, the UK and the eurozone means that monetary policy is tightening, which could become a drain on growth even as economies slow down.”