Inflation and high interest rates in the UK – how do other economies compare?

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By Dharshini DavidGlobal Business Correspondent, BBC News

1 hour ago

image source, Getty Images

Inflation is still higher in the UK than in many other wealthy countries, so interest rates may still stay higher for longer.

So how does the UK fare in other areas of our economic well-being? Include growth, jobs and taxes and it’s a mixed picture.

Inflation

Despite all the talk of falling inflation, that still means prices are 7.9% higher in the UK than a year ago. In the EU, this rate is 5.5%, it is even lower in the United States at 3%.

Britain has seen the worst of two sources of price shocks affecting rich countries – the spike in energy and food costs last year brought on by the war in Ukraine and a shortage of workers after the pandemic.

Like the EU, the UK buys a lot of energy – but the effects of falling wholesale gas prices are taking longer to show in our inflation figures

This is because the subsequent introduction of energy support and price movements take some time to be reflected in the domestic bill cap here.

But so-called “core” inflation, a measure that excludes energy and food, remains near its highest rate in 30 years. This suggests there is still high spending on non-essentials, treats, with some people using stored savings during the pandemic or due to salary increases.

Interest rate

It is this discretionary spending that the Bank of England is targeting when raising the cost of borrowing.

But we are not alone. Rates for new mortgage transactions in many other countries have skyrocketed over the past 18 months.

But the impact differs. In the United States and parts of Europe, fixed rate mortgages typically have terms of 25 or 30 years. In some cases, mortgage holders can switch contracts with minimal penalty. The French government also caps rates, so a new 30-year mortgage contract can cost 3.5%. In America, these mortgage rates approached 7%.

It is more meaningful to compare effective rates – the average of existing and new home loans. According to the latest published calculations, in the UK, where the majority are on two- or five-year fixed agreements, it’s just under 3% (although this will rise as more loans are refixed). In France and Germany, it is less than 2%

Although inflation has slowed here, the Bank of England is still expected to raise rates at least once more – and they could stay high for longer than in the EU or the US.

When it comes to growth, Chancellor Jeremy Hunt chooses to point out that since 2010, the UK has grown faster than France, Japan and Italy.

But many experts are comparing where economies were before the pandemic. In the spring of his year, Germany and the UK were the only G7 countries to still have smaller economies than at the end of 2019, according to official quarterly figures.

Analysts suggest factors behind this could include UK consumers being more reluctant to increase spending in the wake of the pandemic. Moreover, international trade is slower to recover from this shock than it has been in other major countries. This may be due to changes in trade agreements caused by Brexit – and weak investment.

In 2023, however, the UK has been more resilient than some expected.

Growth may have stalled, but consumer spending has held up better — those higher wages and those pandemic savings again. It was in fact the Eurozone that went into recession at the beginning of this year.

But higher interest rates cause a slowdown, which takes a while to manifest. Some economists now fear we could see the UK slipping into recession – and others with it.

But we still have a long way to go to catch up.

Unemployment

Despite the ravages of Covid and rising interest rates, our job market hasn’t fared too badly. The unemployment rate in the UK, at 4%, is lower than that of the EU, although it is higher than the 3.6% in the United States.

But there is much more to the image.

To be considered unemployed, people must be available to work and seek employment. Those who are not considered inactive. The UK is rare as one of the few wealthy countries in which there are more inactive people than before the pandemic, hundreds of thousands more, especially as the number of long-term sick people has soared. The OECD ranks the UK at the bottom of the G7 for labor force participation rates (the proportion working or looking for work).

Add the Brexit restrictions, and it equates to shortages in some industries. On the other hand, it could spur wage growth, as workers are better able to secure larger wage increases.

But as these interest rates bite, unemployment could also rise.

Tax

Not only inflation and interest rates have an impact on fortunes. Those earning salaries or running businesses may have noticed higher tax bills.

The proportion of our nation’s income, GDP, paid into the tax department is currently expected to reach a post-war high of 37.7% by 2028.

Do you feel short changed? Our so-called tax burden was actually lower than the EU average, although higher than the US based on the latest comparable figures. The tax authorities in France already receive 45 cents for every euro generated in the economy there.

But most nations will face increased pressures on their public purses, due to aging populations and existing debts.

The past few years have been difficult, but there are areas where the UK could feel particularly short-changed.

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