October 27, 2022
(press release)
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The UK government’s introduction of the mini-budget negatively affected the country’s economy, which was already reeling from high inflation, the Russia-Ukraine conflict, Brexit, and the supply chain issues triggered by the pandemic. Against this backdrop, GlobalData, a leading data and analytics company, expects the UK economy to grow at 3.5% in its October 2022 forecast compared to the previously estimated 4.3% in February 2022 before sliding into a recession (-0.2%) in 2023. Aiming to kickstart the UK economy, the mini-budget, through ‘The Growth Plan’, announced a range of measures including tax cuts worth £45 billion, a freeze in energy bills, VAT free shopping for non-UK visitors and a reversal of the National Insurance rise. Since these were unfunded measures, putting the public finances on an ‘unsustainable path’, investors lost confidence in the UK market which resulted in a financial market disruption. Following the announcement of the mini-budget, the FTSE 100 hit a three-month low and pound sterling depreciated sharply against the dollar. The UK stock market was down by 7.1% and pound per dollar depreciated by 16.4% on a year-to-date basis on October 21, 2022. Arnab Nath, Economist at GlobalData, comments: “A sharp depreciation of the currency will make imports (including raw materials) costlier and will further increase the price of products making life more difficult for UK consumers. However, excluding a cut in stamp duty and a national insurance rise reversal, most of the measures announced in the mini-budget have been scrapped by the new finance minister, but getting the economy back on track remains a real challenge for the government.” Like other European economies, the UK economy’s inflation rate reached a 40-year high of 10.1% and food prices reached a 42-year high of 14.6% in September 2022. GlobalData forecasts the inflation rate will remain at an elevated level of 9.1% in 2022, which is a sharp upward revision from the 5% rate projected in February 2022. Consumers in the UK remain the most vulnerable to the fallout with the European Commission finding that the UK’s consumer confidence index was at -49 in September 2022, which was the lowest level since the index began in 1974. Retail’s sale volume recorded an average decline of 5.5% during April to September 2022. GlobalData forecasts the real household consumption expenditure to contract by 0.3% in 2023. The UK’s real GDP contracted by 0.3% in the three months ending August 2022, with a contraction of 0.1% in services and 0.2% in production. Despite the economy slipping into a recession, the Bank of England (BoE) hiked its policy rate by 50 basis points (bps) in September 2022, its seventh straight move to raise the borrowing costs to tame the cost-of-living crisis. Mortgage rates increased to 5.1% in September 2022, the highest since December 2008, according to the BoE. Nath concludes: “Households are faced with shrinking disposable income due to higher prices, affecting the sales of luxury items as people are paying higher prices for essential goods. On the other hand, home buyers are expected to defer their plans amid rising mortgage rates which may slowdown the housing sector growth. A new fiscal/monetary mix is required to cushion the negative impact of these external shocks by means of targeted fiscal support, while a contractionary monetary policy is needed to tame rising price pressures.”
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