The UK’s economic outlook is still quite fragile as it faces an ongoing £51 billion budgetary deficit and is witnessing a surge in unemployment. National Institute of Economic and Social Research (NIESR) has made desperate calls. They argue instead that the UK government needs to address its fiscal constraints, perhaps by increasing taxation or reducing expenditures on public services. This economic turbulence comes at the same time as the US government’s push to impose massive tariffs on semiconductors, making for a perfect storm of uncertainty.
As the NIESR’s report suggests, the UK government is in for a long and difficult fight if it is to stabilize the economy. The approaching £51 billion black hole could indicate that great fiscal changes are needed. Analysts warn that the government will need to use tax increases or spending reductions to offset those costs.
At the same time, the UK has seen climbing unemployment, including the claimant count reaching an 11 month high. Joblessness is increasing even as inflation sits at a persistently high 3.6%. Many experts are starting to make predictions that this rate will not be going back to the Federal Reserve’s target of 2% for quite a while. The interaction of these factors creates a perfect storm for the UK economy.
Overheating inflationary pressures are building like a pot boiling on the stove. Consequently, companies in the UK are looking at small business loans pushing 10% to 20% interest all-in. The Bank of England is anticipated to announce a 25-basis point reduction in the base rate soon, a decision made despite ongoing concerns about inflation. This dovish pivot indicates a more cautious approach as policymakers look to balance continuing strong economic growth with long term price stability.
On an international front, the United States has shot itself in the foot with aggressive tariffs on semiconductors, creating a 100% punishing tax. An important distinction – these tariffs do not apply to products that already include semiconductors. This decision is a partial victory for the US government’s push to reduce the trade deficit. Under former President Trump, they attempted to remake the manufacturing world.
This unexpected tariff scenario presents a double-whammy of emerging challenges to UK businesses. These companies are heavily reliant on semiconductor components, further adding to the complexity. Our global supply chains are already taxed to the max. These tariffs would provide a double whammy for UK manufacturers and technology companies.
Adding to the economic chaos, in recent weeks Switzerland has been registering the highest inflation rate of any developed country—39%. Such figures underscore the global character of inflationary pressures that every economy is experiencing.
In Germany industrial production unexpectedly fell by 1.9% in June. This drop illustrates that the effects of the global economic downturn are being felt beyond the UK, in other large European economies. The interdependence of these large economies raises the stakes for more coordinated responses to combat surging inflation and mitigate the threat of a global economic slowdown.