The United Kingdom (UK) has the legacy of being the most stable leading economy over the last 500 years. The UK is one of the leading financial markets. Everyone would have heard the term LIBOR (Lodong Interbank Offer Rate) which is the most used word in the debt market. This country is the headquarters of world class bank viz. HSBC, Barclays, RBS, Standard Chartered etc. This country has the most prestigious universities like University of Oxford, University of Cambridge, Imperial College London, University of Edinburgh, University of Manchester, London School of Economics and Political Science (LSE) etc., getting admission in any of these colleges is an accomplishment for any student across the world. Winston Churchill (former PM) once said “the maxim of the British people is Business as usual”. Do these words still prevail in the current context of the UK economy? Let’s see
Going back to the era of World War II and the rise of the USA will be too long and complex. A lot has happened in the last 6 year such as Brexit, Pandemic, Ukraine-Russia war, energy crisis, inflation and fiscal policies decisions. There are some Internal and External factors responsible for current status of the UK economy.
After triggering Article 50 on 4 April, 2017 (2 year countdown for Brexit), the growth rate of GDP has gone down from 2.4% to 1.70% and 1.60% as of 2017, 2018 & 2019 respectively despite normal economic situation in the world at that time, GDP growth slumped by 29.17% in 2018.
The GDP during 1st Quarter of 2017 was 537114 which increased to 546515 in Q1 of 2020 that means that the accumulated growth during 3 years (Q1 2017- Q1 2020) was just 1.75%. Thereafter, the GDP plunged due to nationwide lockdown on 23 March 2020 by the PM Boris Johnson to control the pandemic. Let’s be a little comservative as the comparison period faced 9 days of lockdown period in March 2020. The GDP was down by 0.02 during the last quarter of 2019 while there was no pandemic at that time.
The Brexitrefrendum was held on 23 June, 2016 and at that time the GBP value against USD was 1.4209, this value has not been touched since then. However, there has been range bound valuation but the positive outcome of Brexit is not reflected in currency value.
The net flow of Foreign Direct Investment (FDI) was high in 2016 but failed to maintain the momentum. Despite a massive fall in 2017, there was no bounce back and the declining trend continued.
While analyzing the aforementioned graphical representations, it is evident that there is no sudden change in economic situation although the slower outcome of the previous decision. Brexit was a slow puncture of the economy, later hidden by the Pandemic and Ukraine war.
The referendum for Brexit was done on 23 June, 2016 when the majority of people voted to leave the European Union (EU). On 29 April, 2017 invocation of Article 50 (exit process from EU) and beginning of 2 years of withdrawal notificaton. On 14 March 2019, extension of article 50 was sought. On 21 March 2019 the EU permitted the extension. On 28 October 2019 further extension was granted till 31 January 2020. On 12 December 2020 Boris Johnson won the election and reaffirmed Brexit by 31 January 2020. On 31 January 2020, the UK entered a transition period to leave the EU. Finally, on 31 December 2020, the UK left the single custom union and market of the EU. A huge single market and custom union of 27 countries also got out of hand. It became extremely difficult for businesses in the UK to comply with the rules & regulations of the existing EU. The single EU rules have now been converted into 27 borders which hampered the trade efficiency and cost effectiveness. The transportation of goods which used to take 1 day have turned into 1 week due to separate licenses and clearances with EU countries have made export unviable. The companies from the EU are reluctant to visit the UK counter in trade shows. There is a manpower crisis in the area of hospitality, construction, agriculture etc.
Let’s come to the present by stopping the past. The popular Trickle-Down theory introduced by Liz Trussand KwasiKwarteng through Mini Budget has been outrightly rejected by the market due to unclear execution plans. The tax cut for rich people has negligible possibility to translate into investment at this juncture and the UK economy is already facing stagflation (low growth, rising prices and high unemployment). Example- The UK is collecting £ 100 through tax but now there is a tax cut of say 20% then tax collection of £ 80. In this case, the Government has to reduce the expenditure by 20% which may further drop the economic growth. If expenditure cannot be reduced, then the Government has to borrow to bridge the gap of 20% deficit in tax collection. But, here is the dilemma that borrowing cost is high-
The war between Russia and Ukraine has disrupted the supply chain and is causing high inflation. The food and energy prices have significantly increased the cost of living. The import bills are increasing owing to weakening GBP. The Central Bank is bound to tighten monetary policy resulting in a high interest rate.
The journey for new PM Rishi Sunak is not easy ahead. Boosting trade with EU, Foreign Trade Agreement (FTA) with other countries, upgrading skills, to encourage business investment, strengthening Organization for Economic Co-operation and Development (OECD). The image of the Stagnant Nation needs to be broken. The freedom of the country from EU regulation must be uncashed. Proper planning for energy requirements for the upcoming winter. The right combination of monetary and fiscal policies to be introduced to balance inflation and growth.