- By Dharshini David
- Global Business Correspondent, BBC News
Inflation is still higher in the UK than in many other rich nations, so interest rates may still stay higher for longer.
So how does Britain fare in other areas of our economic well-being? Throw in growth, jobs and taxes and it’s a mixed picture.
For all the talk of lower inflation, it still means prices are a painful 7.9% higher in the UK than a year ago. In the EU that rate is 5.5%, it is even lower in the US at 3%.
Britain experienced the worst of both sources of price shocks affecting rich countries – last year’s rise in energy and food costs caused by the war in Ukraine, and a post-pandemic shortage of workers.
Like the EU, the UK buys a lot of energy – but the effects of the fall in wholesale gas prices take longer to show in our inflation figures
This is due to the later introduction of energy support and price movements take some time before it is reflected in the rate of domestic bills here.
But so-called “core” inflation, a measure that strips out energy and food, remains near its highest rate in 30 years. It suggests there is still heavy spending on non-essentials, treats, with some people using savings stashed away during the pandemic, or due to pay rises.
It is the discretionary expenditure that the Bank of England targets when it increases borrowing costs.
But we are not alone. The interest rates on new mortgage agreements in many other countries have shot up in the last 18 months.
But the effect is different. In the US and some of Europe, fixed rate mortgages usually have a duration of 25 or 30 years. In some, mortgage holders can switch agreements with minimal penalty. The French government is also effectively capping interest rates, so a new 30-year mortgage deal could cost 3.5%. In America, these mortgage rates have approached 7%.
It is more meaningful to compare effective interest rates – the average across existing and new mortgages. According to the latest published figures, in the UK, where the majority are on fixed deals of two or five years, it is just under 3% (although that will rise as more loans are re-fixed). In France and Germany it is less than 2%
Although inflation here has slowed, the Bank of England is still expected to raise interest rates at least once more – and they may stay high longer than in the EU or the US.
When it comes to growth, Chancellor Jeremy Hunt chooses to emphasize that since 2010 the UK has expanded faster than France, Japan and Italy.
But many experts compare where the economies were before the pandemic. In his spring, Germany and Britain were the only G7 countries that still had smaller economies than at the end of 2019, according to the official quarterly figures.
Analysts suggest factors behind it could include British consumers being more reluctant to increase spending coming out of the pandemic. International trade was also slower to recover from that shock than it was in other major countries. Perhaps this is a result of changes in trade arrangements caused by Brexit – and faltering investment.
By 2023, however, the UK has been more resilient than anyone expected.
Growth may have slowed, but consumer spending has held up – the higher wages and pandemic savings again. It was actually the Eurozone that fell into recession at the beginning of this year.
But higher interest rates lead to a decline, which takes some time to become apparent. There are now concerns among some economists that we could see the UK slide into recession – and others with it.
But we have further to go to catch up.
Despite the ravages of Covid and higher interest rates, our labor market hasn’t fared too badly. UK unemployment, at 4%, is below that of the EU but above the US’s 3.6%
But there is much more to the picture.
To count as unemployed, people must be available for work and job searches. Those who are not considered inactive. Britain is rare in being one of the few rich countries where there are more inactive people than before the pandemic, hundreds of thousands more, especially as the number of long-term sick people has risen. The OECD ranks the UK at the bottom of the G7 for labor force participation (the proportion working or looking for work).
Add Brexit restrictions and it equates to shortages in some industries. On the flip side, it can increase wage growth – as workers are more able to secure larger wage increases.
But while these interest rates bite, unemployment may also rise.
In not only inflation and prices that affect wealth. Those who earn a salary or run companies may have noticed higher tax bills.
The proportion of our nation’s income, GDP, paid to the taxman is currently set to reach a post-war record of 37.7% by 2028.
Do you feel short changed? Our so-called tax burden was actually lower than the EU average, but above that in the US on the latest comparable figures. The tax man in France already receives 45 cents for every euro generated in the economy there.
But most nations will face increased pressure on their public coffers, thanks to an aging population and existing debt.
It’s been a tough few years, but there are some areas where the UK can feel particularly short-changed.