Exploring the Numbers: An Unconventional Holiday and Labor Challenges
The Office for National Statistics recently released data indicating that the services sector in the UK experienced a 0.1 percent growth in the second quarter. This growth was primarily driven by consumer-facing services, while there was also an increase in household and government spending. However, international trade saw a decline.
These figures surpassed the forecast made by the Bank of England, which projected a growth of 0.1 percent. Some economists had even predicted a quarter with no growth. These estimates were influenced by the occurrence of three national holidays in May, including a special one for the coronation of King Charles. Additionally, labor disputes throughout the quarter hindered economic activity. The statistics office reported that nearly 388,000 working days were lost in April and May alone due to these disputes, although the number of strikes has been decreasing.
Background: A Modestly Growing Economy
The British economy has experienced sluggish growth over the past year, managing to avoid a recession but failing to show substantial progress. Overall economic output in the country remains below pre-pandemic levels from early 2020.
From the second quarter of 2022 onward, the UK’s economy saw a 0.1 percent expansion each quarter, except for a contraction of the same amount in the July-September period of the previous year.
Recent data suggests a slowdown in the economy. Two business surveys, namely the S&P purchasing managers’ indexes for the manufacturing and services sectors, revealed a decline in activity levels in July, reaching their lowest points in six or seven months.
One contributing factor to this situation is the persistently high inflation rate in the country, leading to a series of interest rate hikes by the Bank of England. During the last meeting, policymakers raised rates for the 14th consecutive time.
Although inflation has slightly decreased to an annual rate of 7.9 percent in June from 11.1 percent in the previous fall, the central bank remains concerned about embedded price pressures, especially through wage increases.
Policymakers emphasized their commitment to maintaining sufficiently high interest rates to curb inflation, with the goal of achieving the target rate of 2 percent. Andrew Bailey, the governor of the Bank of England, stated that it was premature to consider lowering interest rates at this stage.
Comparisons: Economic Growth in Europe and the United States
The eurozone, consisting of 20 countries using the euro currency, has also faced challenges when it comes to economic growth. After a period of stagnation earlier in the year and a contraction of 0.1 percent in the latter part of the previous year, the eurozone experienced a 0.3 percent expansion in the second quarter.
In contrast, the United States has enjoyed more robust growth, with consecutive quarters of expansion surpassing 0.5 percent.
What Lies Ahead: More of the Same
Most forecasters agree that Britain should expect continued slow growth over the next year or two, possibly with a risk of contraction due to the ongoing efforts of the central bank to raise interest rates and curb inflation.
The Bank of England’s recent forecast suggests that underlying quarterly GDP growth in the first half of this year has been around 0.2 percent. They anticipate a similar growth rate in the near future, driven by resilient household income and retail sales volumes.
The National Institute of Economic and Social Research, a London-based think tank, predicts that the UK’s economy will grow by 0.4 percent in 2023 and 0.3 percent in 2024.
Unfortunately, the disproportionately negative effect of this slow growth will be felt by individuals with low incomes, according to the think tank. Their report states that “low economic growth and stagnant productivity are increasing the financial vulnerability of households in the bottom half of the income distribution and the incidence of destitution at the poorest end.”
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