Why PwC Forecasts Slow Growth in the UK Economy Amidst Multiple Challenges
Over the past few years, the prospects for economic growth in the United Kingdom have been little more than a mirage. According to projections by major international financial institutions and global consulting firms like PwC, the UK's economic performance is expected to remain sluggish for the foreseeable future. This article delves into the myriad challenges facing the UK economy, particularly the forecasts shared by PwC, and the structural issues that are likely to continue hampering growth.
The Current Economic Landscape
Ignoring the short-term fluctuations, virtually all economic forecasters including the British Bank of England (BoE) and the International Monetary Fund (IMF) predict that the UK will struggle to achieve robust growth. In fact, the IMF has positioned the UK at the bottom of the global growth list, with countries like Argentina even below it. The BoE's 'fan chart' illustrates a 40% probability that the UK economy in 2026 will be below the 2019 level, indicating a persistently sluggish recovery.
Challenges Facing the UK Economy
The economic challenges faced by the UK are diverse and interlinked. The post-pandemic recovery, which should have been a promising turnaround, was severely disrupted by the sharp energy price shock following Russia's invasion of Ukraine. This event significantly impacted energy supplies, driving up costs and adversely affecting the overall economy. Additionally, the labour force participation rate has dropped, primarily due to an increasing number of individuals becoming long-term sick, adding to the burden on the healthcare system (NHS).
To combat the high and sticky inflation resulting from these challenges, the Bank of England had to raise interest rates, which tightened financial conditions and had a negative impact on the economy. Despite these measures, economic growth is forecast to be modest at 0.4% for 2023, followed by 1% in 2024. This is a far cry from the pre-pandemic levels of growth, which were much more robust.
Structural Challenges in the UK Economy
The UK economy is confronting structural challenges that are impeding long-term growth. One of the most notable issues is the decline in potential growth, estimated at around 1.5%. This reflects a lack of productive potential, indicating that the UK's economy is struggling to maintain pre-crisis performance levels. Prior to the 2008 global financial crisis, the UK performed exceptionally well among the Group of Seven (G7) countries. However, in the mid-2010s, this momentum was lost, as the UK's real business investment has remained relatively stable while other G7 economies experienced growth of 14%.
A significant factor contributing to the decline in real business investment is a weak labour supply. While the UK has nearly returned to pre-pandemic levels in terms of the labour force, it lags behind peers in terms of productivity growth. This can be attributed to a slower pace of innovation and technological diffusion. For instance, the terms of trade shock, coupled with historically tight labour markets, has pushed inflation to record levels, further compounding the economic challenges.
Government Actions and Reforms
Recent government actions have aimed to address some of these challenges. The Bank of England has tightened monetary policy, most recently raising interest rates by 50 basis points in June. Fiscal policies have also been implemented to combat inflation. However, to achieve lasting stability and growth, ambitious structural reforms are necessary. These reforms should focus on bolstering the UK's productive potential, including investments in infrastructure, education, and new technologies.
While some of these issues were exacerbated by the Brexit referendum, not all can be directly attributed to it. Nonetheless, the overall economic landscape remains challenging, with the UK economy expected to grow at a slow pace for the near future. PwC's forecast highlights the need for sustained efforts to overcome these hurdles and return the UK to a path of sustainable and inclusive growth.