UK held back by staff shortages, Brexit and mortgage costs, says top economist | Economics
Labor shortages, expensive mortgages and the ongoing effects of Brexit are weighing on the economy as the UK becomes the G7’s weakest economy this year, the head of a leading think tank said.
Paul Johnson, director of the Institute for Financial Studies, said there were particular factors holding back growth in the UK as policymakers and analysts reacted to an International Monetary Fund warning that the UK economy would contract by 0.3% in 2023.
Speaking on Radio 4 Today on Tuesday, Johnson said the UK’s performance doesn’t look all that bad when 2022 and 2023 are taken together, as the IMF estimates last year’s 4.1% growth will be the highest in the G7.
But Johnson said other countries have not been hit as much as the UK by labor shortages, which the IMF has identified as one of the factors holding Britain back. Johnson said there were half a million fewer people in the UK workforce than before the pandemic due to early retirement and fewer EU immigrants.
“This will not affect any other country in Europe… This is a particular issue for us,” said the IFS director. He added that the ongoing “Brexit challenges” and the rapid impact of higher interest rates on the cost of mortgages were also factors.
Despite the IMF’s gloomy forecasts in its World Economic Outlook update, the Bank of England is expected to raise interest rates on Thursday by 0.5 percentage points to 4%. However, Threadneedle Street is also likely to raise its economic forecasts after better-than-expected results at the end of 2022.
Transport Minister Richard Holden said the IMF had been wrong before and predicted the UK would do better than expected this year. Speaking to Times Radio, Holden said: “They were wrong in the last two years, the OECD was also wrong in the last two years. I think the UK can beat those predictions.”
Rachel Reeves, Labor Shadow Chancellor, said: “The UK has a lot of potential, but too many signs point to really tough times for our economy, leaving us behind our peers.
“The government must do everything possible to make our economy stronger and ensure its growth. This is the only way we can go beyond teetering from crisis to crisis, as it has been for too long. Labor has a proper growth plan that will get our economy back on track.”
Sophie Lund-Yates, lead analyst at Hargreaves Lansdown, said: “The UK is facing some specific challenges, including over-reliance on high retail energy prices, which is putting a strain on household budgets. There is also a serious labor problem in the UK, which was originally caused by Brexit but has been exacerbated by the post-pandemic workforce cuts.
“Mortgage rates are also prohibitive in the UK, putting additional pressure on the economy as it limits the amount of money people will spend on non-essential needs. Ultimately, the UK has a productivity and demand problem, which together create a very difficult environment.
“There is a chance that the UK could do better than the IMF predicts, given rising expectations from other bodies in recent months.”