Britain has come out of the pandemic with most economic indicators flashing red. The outlook for the UK economy has weakened this year and next in response to the Russian invasion of Ukraine, a messy EU divorce process that remains unresolved and supply chain blockages affecting many business sectors.
Following the departure of Boris Johnson, a new government will have to free itself from spending constraints by former Chancellor Rishi Sunak to ease inflationary pressures on households and prevent a possible fall into recession with additional support for companies.
These are the main economic problems that ministers will have to face.
Inflation
The consumer price index has risen from almost zero during the pandemic to 9.1% and is expected to exceed 11% in October, when rising energy prices will make combined average bills of gas and electricity exceed £ 2,800 per year.
Most economists believe that price growth will slow next year, but their forecasts depend on the end of the war in Ukraine.
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The price of Brent crude almost doubled to $ 128 a barrel the year before Russia’s invasion of Ukraine, before retreating: it was $ 102.5 on Thursday.
GDP
Britain suffered the biggest drop in national income (GDP) since the early 18th century, when the economy slowed in April 2020. It recovered quickly, but the recovery slowed this year when the world economy began to stutter.
The UK imports more than half of its food and most of its gas and oil, making it especially vulnerable to global shocks.
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The next official GDP figures for May are expected to show a third consecutive month of contraction. The UK economy is only 0.9% bigger than in November 2019.
Tax burden
Ministers face pressure from conservative MPs from the back bank to reverse the Johnson administration’s plans to raise taxes on businesses and households on the rest of parliament to pay for spending during the pandemic.
However, the scope of fiscal cuts is limited, especially when many conservatives are also calling on the government to increase its defense budget in the face of Russia’s renewed threat.
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The likelihood of further economic shocks and the aging of the population will further increase the demands for additional cash from the Treasury.
UK trade
France and Britain have been followed for decades in graphs showing the value of trade as a percentage of GDP.
The post-pandemic global recovery last year lifted all ships. However, recent figures have shown that British trade is stagnating while France’s position has improved dramatically. Brexit is to blame for many economists from the less optimistic outlook for the UK.
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In its latest assessment, the Institute of Export and International Trade said total export earnings in the UK fell 2% from the previous month, “highlighting the struggles facing companies such as as a result of the pandemic, the supply chain crisis, the conflict between Russia and Ukraine, and Brexit ”.
UK labor
Official estimates show that the UK has about 1.2 million fewer workers in 2022 than expected in 2019.
Many EU workers returned home during the pandemic, older workers retired early and tens of thousands of students returned to education.
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David Miles, the chief financial adviser to the Office for Budget Responsibility, said some older workers and many students would probably return to the job market, but it was reasonable to judge that the UK had suffered a permanent downturn, which led to a sustained labor shortage in some industries.
Brexit and Covid have also combined to reduce the number of workers looking for work, raising wages and hindering recovery.
R&D expenditure
Scientific spending has fallen and the promise of increasing funding for research and development remains that: a promise.
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Sunak plans to increase UK R&D spending to 2.4% of GDP, up from 1.74% last year. France already spends 2.2% of GDP, the US 3.1% and Germany 3.2%. The chancellor initially wanted to achieve this in 2025, but earlier this year he advanced the date to 2027.
This article was amended on 8 July 2022 because an earlier version erroneously stated that the UK imports most of its energy. It meant that the UK imports most of its gas and oil.