The UK will likely be the first developed country to fall in a recession as a glance to its economic indicators suggest.
Ten days from now, Charles III will be officially crowned, becoming King of England and the Commonwealth realms. Charles will also inherit a country in extreme economic difficulty, possibly facing the UK’s worst economic crisis in decades.
While the coronation is set to attract more tourists to the country, the tourism industry in the UK has yet to recover pre Covid-19 levels. According to the Associated Press, in 2022 the UK hosted 29.7 million tourists, a third less than in 2019.
But tourism is not the only sector in crisis. In fact, the UK is by far the worst performing economy of the G7 and will likely be the first developed country to fall in a recession.
According to IMF revised data from April 2023, UK’s Gross Domestic Product is expected to contract in 2023, only to flatten in 2024. This year, the country’s GDP should decrease by 0.3%, a better forecast than what was published in January.
While the British economy is expected to stagnate (and in fact has been doing so since Brexit occured), its inflation remains one of the highest in the developed world. In March 2023, British inflation was 8.9%, compared to the EU’s 6.9% and the US 5%.
A deceiving pound
The only economic data that seems to favor the UK is the value of the British Pound. In fact, the pound has been the best performing G10 currency in 2023.
This year, the British pound increased 3.16% in value against the US dollar, more than any other major currency.
Such value increase, however, hides a much darker scenario. The main reason the British pound is now rallying is because it reached essentially rock bottom last October, trading almost equally to the dollar. Liz Truss’ disastrous policy absolutely tanked the pound, and it could only go up from there.
Further, the pound is now growing in value also because of the harsh monetary tightening by the Bank of England. The BOE has raised interest rates at a faster pace than the already unprecedented hikes of the American Federal Reserve.
But while the Fed is expected to stop raising interest rates soon, hiking perhaps another 0.25%, the BOE will likely keep increasing them. In 2023, the BOE is expected to raise interest rates by a further 0.5%, with no clear end in sight.
These major hikes have the double effect of reducing inflation and appreciating the pound. But they also have the effect of slugging down the economy.
For all the reasons listed above, the United Kingdom will likely be the first developed country to experience a recession. All the other major economic zones will stand and watch, likely taking notes on what will inevitably happen to them next.
