A shortage of workers, expensive mortgages and the continuing effects of Brexit are all weighing on the economy as the UK shapes up to be the weakest major G7 economy this year, the head of a leading thinktank has said.
Paul Johnson, the director of the Institute for Fiscal Studies, said there were special factors holding back growth in the UK as politicians and analysts responded to a warning from the International Monetary Fund that the UK economy would shrink by 0.3% in 2023.
Speaking on Radio 4’s Today Programme on Tuesday, Johnson said the UK’s performance did not look quite so bad if 2022 and 2023 were considered together, since the IMF estimated growth of 4.1% last year would be the highest in the G7.
But Johnson said other countries were not being affected to the same extent as the UK by shortages of labour – identified by the IMF as one factor holding back the UK. Johnson said the UK labour force had half a million fewer people than before the pandemic as a result of people retiring early and fewer EU immigrants.
“That’s not affecting any other country in Europe … That’s a particular challenge for us,” the IFS director said. The continuing “challenges from Brexit” and the rapid impact of higher interest rates on mortgage costs were also factors, he added.
Despite the gloomy IMF 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%. Threadneedle Street is, however, also likely to upgrade its forecasts for the economy after a its stronger-than-envisaged performance in late 2022.
The transport minister, Richard Holden, said the IMF had been wrong before and predicted the UK would do better than expected this year. Speaking on Times Radio, Holden said: “They’ve been wrong in the last two years, the OECD were also wrong over the last two years. I think Britain can beat those predictions.”
Rachel Reeves, Labour’s shadow chancellor, said: “Britain has huge potential – but too many signs are pointing towards really difficult times for our economy, leaving us lagging behind our peers.
“The government should be doing all it can to make our economy stronger and to get it growing. It is the only way that we can move beyond lurching from crisis to crisis as we have been for far too long. Labour has a proper plan for growth that will get our economy back on track.”
Sophie Lund-Yates, a lead equity analyst at Hargreaves Lansdown, said: “The UK is facing some specific problems, including its overexposure to high energy retail prices, which are weighing on household budgets. The UK also has a significant labour problem, which was initially caused by Brexit but has been made worse by a shrinking workforce since the pandemic.
“Mortgage rates are also prohibitively high in the UK, which adds further pressure to the economy because it limits how much money people will spend on non-essentials. Ultimately, the UK has a productivity and demand problem, which when put together creates a very difficult environment.
“There’s a chance the UK could muster a better performance than the IMF is predicting, given upgrades to expectations from other bodies in recent months.”
