How Britains economic woes stack up against Europes a close look at the figures | Economics

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Say, grim, dismal: all words used to describe the UKs economic situation after Thursdays autumn statement.

In recent decades, the UKs GDP growth averaged somewhere between the higher rate of the US and the lower rate in the eurozone. Thats starting to change, Carsten Brzeski, global head of macroeconomics for ING Research, told the Observer. It took Brexit for the UK to converge with the eurozone economy, he said. The outlook is very similar to what were seeing in continental Europe.

Britains post-pandemic recovery has been notably weak. The latest slimmed-down OBR forecasts do not include international comparisons, but. However, s some data suggests the UK faces an especially poor outlook, even if many of its challenges are shared with its neighbors and trading partners.

First in, last out

The UK is now in recession, according to both the chancellor, Jeremy Hunt, and the OBR. Britains output already shrank by 0.2% in the three months to September, the ONS said. That compares with 0.2% growth in the eurozone, with France and Germanys output growing by 0.2% and 0.3% respectively. In the US, the economy grew by 0.6% in the same period (although there are some variations in how countries measure their economies). We expect the UK to be first to enter a recession, and the last one to pull out, said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

OBR recession chartCovid recovery

At least part of the reason for Hunt and the OBRs gloom is the scarring effect of the Covid-19 pandemic. The UK will only return to its prepandemic growth level by the end of 2024, according to the OBR, and total economic output in the UK was still 0.4% lower than pre-pandemic by the end of September, data from the Office for National Statistics showed. The OBR has forecast a drop of 2% of GDP before Britain returns to growth.

The US economy, by contrast, is already 4.2% above its pre-pandemic level, while eurozone GDP is 2.1% higher relative to the end of 2019, according to figures from the Organization for Economic Co-operation and Development.Growing inactivity

The UK labor market is incredibly tight compared with many of its international counterparts, said Marchel Alexandrovich, of Saltmarsh Economics. Having fewer workers to spare can fan the flames of inflation, as employers increase wages to attract and retain staff. But there is another problem in Britain: people of working age falling out of the labor market, and being classified as inactive. While the UK has traditionally had a lower inactivity rate than many of its eurozone peers, this measure has risen sharply during the Covid-19 pandemic and its aftermath. Some economists, including Alexandrovich, think the UK is developing its own particular problem with this metric. It looks like it is long-term sickness, rather than just some long Covid at play. Theres a mounting problem with healthcare backlogs thats adding to the lack of flexibility in the UK labor market, on top of Brexits impact on migration, Alexandrovich said.

Real GDP covidGrowing inactivity

The UK labor market is incredibly tight compared with many of its international counterparts, said Marchel Alexandrovich, of Saltmarsh Economics. Having fewer workers to spare can fan the flames of inflation, as employers increase wages to attract and retain staff. But there is another problem in Britain: people of working age falling out of the labor market, and being classified as inactive.

While the UK has traditionally had a lower inactivity rate than many of its eurozone peers, this measure has risen sharply during the pandemic. Some economists, including Alexandrovich, think the UK is developing its own particular problem with this metric. It looks like it is long-term sickness, rather than just some long Covid at play. Theres a mounting problem with healthcare backlogs thats adding to the lack of flexibility in the UK labor market, on top of Brexits impact on migration, Alexandrovich said.

Working age economic inactivityUnemployment

The UKs latest data for the three months to September showed 3.6% unemployment, which is relatively low compared to some other advanced economies. It is set to peak at 5% in 2024, according to the International Monetary Funds October forecast. This is just under the 5.4% predicted for the US, and lower than expectations for France, Italy and Canada, but higher than the 3.2% expected in Germany.

UnemploymentInflation

The inflation game has fundamentally changed, according to Brzeski. Hes considering penciling in a double dip recession of back-to-back winter slumps in the Eurozone due to the severe shock of higher imported energy costs. The picture for the UK looks similar, he said.

Theres been a structural shift in energy. It will last for a couple of years, until the transition away from Russian gas is finalised. Globalization as we know it is over. Theres so much going on that it makes a typical recession and rebound unlikely, said Brzeski.

The latest figures show inflation reached a 41 year high in the year to October of 11.1%, if this is harmonized – to try and compare like-for-like-inflation was 10.6% for the eurozone. France is a notable outlier, with some particularly large energy market interventions, with 7.1% inflation in October according to Eurostat.

Higher inflationHigher interest rates

Most major central banks are raising interest rates in order to combat global inflationary pressures as Russias war in Ukraine has disrupted energy markets, and in the wake of the Covid-19 pandemic.

Yet while some economists expect the Bank of England to hike its base rate, which feeds through to mortgages to 4% next year, the European Central Bank is set to raise its key deposit rate to only around 2.5% according to Tombs.

This will be more painful for UK consumers for other reasons, too. British households are also more indebted than those across the EU as a whole, and must refinance more of it over the next year than their overseas counterparts, said Tombs.

Sluggish productivity

The UK is roughly middle of the pack if you compare productivity growth to other major economies from 2011 to 2019. This is a measure of the output of a worker per hour. Its a form of growth that does not drive up inflation, and therefore a top aim for policymakers.

Figures compiled by the OECD and analyzed by TS Lombard show the UKs productivity rose 0.7% from 2011-19, the same as France and Germany, and ahead of Japan at 0.4%, but slightly lower than the US and Spain at 0.8% and 0.9 % respectively.

But a big driver of sluggish productivity growth has been the catch-22 of the need to boost growth with bold spending commitments, but also to stay within strict borrowing rules, according to Freya Beamish, chief economist at TS Lombard. Economies are multidimensional and Brexit was binary, so remainers are overly gloomy and Brexiters were overly optimistic and the truth is somewhere in between, she said. But policymakers lacking vision and desperate to tick boxes that they themselves have created [the OBR] will condemn the economy to a worse than necessary outcome.

Labor productivity

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