UK's crisis: Is the world's advanced economy in danger?

Even if it is predicted that the United Kingdom will not enter a recession this year, the nation’s economy is projected to be difficult. The recovery has been hindered by the energy price shock brought on by Russia's war in Ukraine. 

The Intranational Monetary Fund (IMF) reported that growth is expected to be only 0.4% in 2023 and 1% in 2024. Due to unusually tight labor markets, the terms of trade shock have also caused inflation to reach record highs. In order to combat inflation, the authorities have rightfully tightened fiscal and monetary policy, most recently with a 50-basis-point increase in interest rates in June. 

It is worth mentioning that the UK had been one of the G7 nations' top performers before the global financial crisis of 2008. But in the middle of the previous decade, this momentum was lost. Real business investment remained marginally below 2016 levels by 2022, as opposed to a 14% rise in other G7 nations.

It is predicted that the UK will face five years of “lost” economic growth and could enter a recession next year. According to the National Institute of Economic and Social Research (NIESR), by 2024, unemployment and debt levels will have increased along with income inequality.

Sky News reported that the poorest households' disposable incomes will witness a shortfall by 17% in 2024 compared to five years prior, and the richest households will only drop by 5%. 

Since the Covid-19 pandemic, the UK's public debt has increased by more than 40% to approximately £2.6 trillion ($3.3 trillion), surpassing the nation's whole yearly economic output for the first time since 1961. Because of its large reliance on index-linked bonds and its high inflation rate, Britain will have to pay more to repay its debt than any other advanced economy, according to Fortune. 

It is worth noting that the first index-linked gilts were issued when Margaret Thatcher was the prime minister in the 1980s as the nation battled to repay a loan it had taken from the IMF in 1976. Despite the fact that a Treasury report from the era demonstrates that officials were aware of the dangers of linking debt to inflation, these bonds accumulated throughout years of low inflation. Presently, linked gilts now account for a quarter of outstanding UK bonds. It is equivalent to the share of Italy, the next largest issuer among advanced economies.

The IMF suggested a number of policies that would help with the authorities’ efforts to get through the crisis. It includes strategies to increase investor confidence with a solid, long-term approach to promoting corporate investment, including a permanent package of tax benefits that may be applicable to investments other than those in plant and machinery. The main causes of the post-pandemic surge in inactivity are long-term illness and, to a lesser extent, early retirement. Therefore, it is essential to improve health outcomes. Moreover, upskilling, knowledge expansion, and greater investment in young adults' education and training can boost human capital and increase labor productivity.