Economy Round Up

The last year, and the events leading up to it, have had major impact on the UK economy. They have both tested its resilience and shown its weakness.

There are murmurs of a recession, but in real terms, it is unlikely that we will feel much impact in comparison to 2008/09. We have seen very mild growth in January (0.3%).

The Bank of England (BOE) base rate currently sits at 4% (February 2023). Interest rate increases have been the main tool in attempting to control inflation. Further rate increases are likely. Six months ago, economists were predicting the BOE base rate to exceed 5%, now they are predicting a marginally lower rate of 4.5%.

For those taking out new debt the main decision has been around whether a fixed rate is worth it or not. The cost of a fixed rate is now only marginally different to a variable rate loan.

Inflation is currently 8.8% (January 2023). It is highly likely that we have now seen the peak in the UK and the challenge is now getting inflation back under control. The BOE target is 2%.

Inflation across the world is coming back down at a much faster rate. Inflation in France is 6.2% (February 2023) and Canada is 5.9% (January 2023). The main reason for the slower reduction in inflation in the UK is labour availability.

Agflation has been as high as 25% / 30% in the past year. Farming businesses have been able to cope with this increase in input costs as output prices have followed suit. In recent months, output prices have reduced significantly but Agflation has remained at just below 20%.

The labour market has been incredibly pressured in the UK. This has been caused by two main factors:

1. Brexit - The UK's departure from the EU has led to changes in immigration policies that have made it more difficult for EU citizens to work in the UK. Covid also highlighted to many EU workers that it was not quite as easy to get home.
2. Early retirement - The UK has an aging population which has led to a decline in the number of working-age individuals. This situation has worsened post Covid as a proportion of workers nearing retirement age did not return to work following the pandemic.

This has had an impact on the overall UK economy and has hampered the ability of the BOE to tackle inflation.

A labour shortage can result in:

1. Higher wages - businesses compete for a smaller pool of workers and therefore may need to offer higher wages to attract and retain employees. This can lead to higher prices for consumers and potentially fuel inflation.
2. Low economic growth - a labour shortage can impact the overall economic growth of the country as businesses are unable to expand or innovate due to a lack of workers.

The government has supported UK households with energy bills over the winter and spring of 2022/23.

The impact for farming businesses has been varied, but for those business with intensive units such as poultry or robotic dairies, the impact has been significant.

The price of gas is now starting to return to pre-war levels. The future of energy prices is linked to the longevity of this war and the speed at which the UK can become more self-reliant from renewable and nuclear energy.