The UK’s trade prospects remain lackluster due to slow economies in major trading partners
GlobalData, a leading data and analytics company, predicts that the United Kingdom’s economy is set to experience a marginal growth of 0.1 per cent in 2023. This upturn is attributed to several factors, including lower energy prices, government support measures, and a robust labour market. However, the country’s trade prospects may remain lackluster due to sluggish economies in major trading partners. Additionally, businesses continue to face a high cost of financing, which remains a concern.
GlobalData’s “Macroeconomic Outlook Report: UK” highlights that while the projected growth in 2023 represents a notable slowdown compared to the 4.1 per cent achieved in 2022, it diverges from the previous contraction outlook. In the first quarter of 2023, the British economy grew by 0.1 per cent on a quarterly basis, unchanged from the previous quarter but an improvement from a decline of 0.1 per cent in the third quarter of 2022. The services, construction, and manufacturing sectors experienced modest growth, while sectors such as education, health, public administration, and transport faced declines. Stagnant household spending was offset by positive contributions from business and government investment.
Although the inflation rate is expected to ease, it is projected to remain elevated at 7 per cent in 2023, down from 9.1 per cent in 2022 but significantly higher than the Bank of England’s target of 2 per cent. To address high inflationary pressure, the Bank of England increased its policy rate 11 times by a total of 425 basis points to 4.5 per cent in May 2023. The combination of slowing but elevated inflation, along with tax hikes, is expected to restrain domestic demand. GlobalData forecasts a contraction of 0.5 per cent in real household consumption expenditure in 2023 compared to 3.9 per cent growth in 2022.
Bindi Patel, Economic Research Analyst at GlobalData, expressed concerns about high food prices potentially leading to a food crisis despite the decrease in energy prices. Food inflation has remained above 10 per cent since July 2022, causing a cost-of-living increase for 95 per cent of adults in Great Britain as of May 2023. This situation has resulted in heightened demand for food bank charities such as the Trussell Trust, highlighting the pressing issue of affordability and access to essential food supplies.
In terms of sectors, financial intermediation, real estate, and business activities contributed 34.4 per cent to the gross value added (GVA) in 2022, followed by mining and manufacturing (13.6 per cent) and wholesale, retail, and hotel activities (12.9 per cent), according to GlobalData estimates. These sectors are expected to grow by 4.8 per cent, 4.6 per cent, and 4.7 per cent respectively in 2023, a significant slowdown compared to the growth rates recorded in 2022.
On the policy front, the UK government implemented spending cuts and tax hikes to restore the country’s financial credibility. However, these measures have resulted in nearly 3 million low- and middle-income individuals paying basic or higher-rate tax for the first time starting in April 2023 due to the freeze on income tax thresholds. While these actions aim to improve the country’s fiscal position in the future, they may have an ongoing impact on domestic demand.
Despite the challenges, the UK is ranked as a very low-risk nation and performed well in various parameters, including legal, technological, and infrastructure aspects, as well as environmental factors, according to the GlobalData Country Risk Index (GCRI Q1 2023). The country’s establishment of 70 free trade agreements as an independent nation, with additional agreements in the negotiation process, provides an optimistic outlook for sustained economic growth in the coming years.
In summary, while the UK economy is expected to witness a marginal growth in 2023, the pace of expansion has slowed, and challenges in trade and inflation persist. However, the government’s support measures, robust labour market, and the country’s free trade agreements offer hope for the UK’s economic prospects.
