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The predicament of UK economy

Oct 29,2022 - Last updated at Oct 29,2022

The decline in the sterling pound has given investors a feeling of mistrust in the British currency, thus, the economy as the British financial and economic policies are replicating those adopted by the emerging countries in terms of austerity measures and means to curb inflation.

Political instability, trade turmoil, energy crisis and soaring inflation are driving the UK to an emerging country status at a time the Bank of England warning that the British economy would enter its longest recession since the global financial crisis, leading to a 2.1 per cent drop in the country Gross Domestic Product (GDP). Meanwhile, inflation is expected to peak above 13 per cent by end of October and early November, 2022. More importantly, the central bank does not expect a sharp recovery after the recession, and regards the GDP 1.75 per cent below current levels by mid-2025.

According to experts, the Brexit has not been the most important challenge that British policymakers have to tackle. It is the long-term stagnation in productivity that reflect on real income. If the government cannot solve this issue, it is unlikely to solve many other related important quandaries. Even the current cost-of-living crisis is very grave because of the terrible long-term performance.

The British issue stared with the Brexit. The EU consists 50 per cent of UK trade. The end of this partnership means end of labor transfer, capital, and investments.  What is happening in Britain, following the collapse of the Sterling to an unprecedented level was also a result of government announcement of huge tax cuts and investment incentives to boost economic growth, while the central bank has been working to tighten financial conditions to curb high inflation.

The pound fell by as much as 5 per cent against the US dollar to reach US$1.0327, the weakest level in its history. At present, the pound is still down more than 20 per cent since the beginning of 2022.

The deficit in the UK trade exchange is slated to increase, forming 8 per cent this year and in 2023 of the country’s GDP. This means the country will either attract foreign investments or seek loans. Foreign and British companies started to leave the UK, causing trouble for the British government. The UK debts at present are equal to the country GDP. 

Former British Prime Minister Liz Truss resorted to populist solutions to curb inflation: Increasing investments would lead to increase in production of products and services. The more products the less prices (trickle-down effect).  This has prompted Truss to take risk by deciding solely to decrease taxes on big corporations and to place ceiling for electricity consumption of big corporations (the difference to be paid by the government) in a bid to enhance foreign investments. 

The UK debts stand now at US$ 2.9 trillion dollars compared with US$2.9 trillion-dollar GDP. If to add companies and people’s debts, this amount will be more than US$3.8 trillion.

This drove investors to ask for higher yields on bonds (5 per cent). In addition, personal loans are limited and controlled, leading to major housing problems for the young generation which would yield to recession in real estate market, one of the biggest sectors in the UK.

The solution is that the UK needs to seek creditors, and this can only be through issuing bonds for foreign investors who ask for 5 per cent. This is a high rate, that would cause a high risk or even a threat to the country’s national security as one of the most important sectors: the real estate will be badly as interest rates have doubled on personal loans and on mortgages, a case similar to what happened to the US in 2008.

As the interest rates are getting higher and higher, investors have been losing confidence, trust in the UK government and its financial and economic policies to address the deficit in the budget. This caused accumulation of debts at various levels and many corporations and individuals defaulted because of their inability to pay their loans.

This has prompted the UK government to issue more banknotes to curb inflation. However, this has backfired and negatively affected the majority of British citizens who suffer a double-kick: Inflation and recession.

The UK should have short term policy with austerity and seeking the assistance of the International Monetary Fund by spending only on necessary sectors such as education and health sectors. The other option is to cancel the Brexit and return to the EU umbrella.

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