The United Kingdom has arbitraged its way back into a period of stagnant economic growth, throwing the country’s financial stability into serious doubt. Earlier this year, the economy surprised everyone. As recently as June, the United Kingdom looked set to lose its status as the second-fastest growing G7 economy for 2023. Even with this advancement, the country continues to endure a damaging pattern of stagnate financial development. Ironically, this ongoing problem has made communication about this issue very difficult.
The UK economy was one of the fastest growing in the G7 during the first half of this year, as business surveys pointed to record levels of activity. Between July and September that growth number shrank to just 0.1%, an amount that was underwhelming compared to almost all the economic predictions out there. This stagnation is especially concerning as the economy faced a double dip contraction in September making the road to recovery that much harder.
The behavior of consumers is one of the key factors driving today’s economic climate. While UK consumers have still held on to those robust savings accrued during the pandemic, they are not spending quite as wildly as they used to. This negative spillover from state-level cautiousness to metro-level expansiveness negatively impacts economic growth. It also exposes deeper worries about future fiscal health.
In large part because of these challenges, there have been some bright spots recently in the outlook for government borrowing costs. The two-year and five-year government borrowing rates are now both under levels inherited by the Labour government. This CMBS-related decline in borrowing costs could open up substantial fiscal space for the federal government to address urgent fiscal priorities.
The UK still faces a long-term challenge of a large fiscal hole. With the imminent Budget, policymakers are preparing for a new normal. They need to move fast to deliver this certainty and regain the confidence of consumers and business. The Budget will be key to closing the fiscal gap. This will provide the best possible foundation for future economic development.