The U.K. economy could stare down long-term irrelevance without immigration

The U.K. economy is running out of places to look for a good news story as its economy continues to deal with inflation while its neighbors in Europe leave rising prices in the rearview. Now it’s likely to impact the country’s growth prospects. 

The Organisation for Economic Co-operation and Development (OECD) released its latest forecast for developed nations Thursday, and it didn’t make pleasant reading for the U.K. 

The country was one of only a few nations to have its outlook downgraded by the organization, now expected to grow at 0.4% instead of 0.7% previously.

While its economy is still expected to grow faster than Germany, which is forecast to expand at just 0.2% this year, the U.K. is losing more ground to the Eurozone, which collectively is forecast for 0.7% growth in 2024.

It’s the latest troubling data point for the U.K., which is struggling to shake off high inflation and is still feeling the effects of a reputational hit from 2022’s budget crisis.

According to Jens Eisenschmidt, Morgan Stanley’s chief economist for Europe, it has at least led analysts to find an easy way to sum up the embattled nation.

“Think about Europe, but everything a little worse,” is how Eisenschmidt describes the U.K.’s current economic status.

It’s a sentiment that bore out in the OECD’s latest outlook, and one that has policymakers in the country on the ropes.

The U.K.’s central bank, the Bank of England, is expected to be slower out of the block than the European Central Bank (ECB) in introducing interest rate cuts to stimulate growth, Eisenschmidt says. 

The U.K. is suffering from stickier inflation than its European peers. Prices rose by 2.4% in the Eurozone in April, while in March the U.K.’s CPI rate measured 3.4%, putting the former on a faster track to interest rate cuts.

Eisenschmidt said the source of this stickier inflation was up for debate. However, the blame could be pinned on a mounting worklessness crisis in the U.K.

Economic inactivity has been soaring in the country, accelerated by a growing long-term sickness trend and youth unemployment.

The country hasn’t been able to benefit from migration flows to offset a tight labor market, unlike in the European Union’s common market. 

As a small open economy, the U.K. has also been more vulnerable than the EU to a flight of capital following market shocks, as summed up by the currency hammering budget of September 2022. 

Eisenschmidt said these pressures left the U.K. “more exposed to the need for household discipline” in the short run. 

The outcome of this year’s U.K. General Election, the date of which is pending, is another major short-term variable impacting the fortunes of the economy.

Aging populations

A trend of labor market flows having an outsized impact on economic performance is one the U.K. should get used to.  

Eisenschmidt said developed European nations share a common threat of aging populations. As demographics shift older, developed economies are expected to struggle with labor shortages, compounded by the need for labor to care for older citizens.

Increasingly, as Eisenschmidt points out, countries will become more reliant on immigration from younger countries to fill in gaps in the labor market.

The U.K., however, has developed a reputation for being inward-looking in recent years. The country voted to leave the European Union in 2016 in a debate that focused heavily on immigration levels from elsewhere in the EU. 

Domestically, a melting pot issue in recent months has been the government’s contentious plan to deport asylum seekers to Rwanda. 

Despite this, total immigration to the U.K. has risen consistently since the U.K.’s Brexit vote. Net migration, however, has dipped as more people left the country following the vote.

A silver lining for the country, however, is despite its own attitude towards immigration, Eisenschmidt says the U.K. still looks like one of the best places for foreign residents.

“One key measure of long term success or less relative decline is your ability to attract migrants, and to incorporate them into the labor force.

“I would say here, from my perspective, the UK doesn’t score too badly, simply because of the language and the great educational institutions that have a great brand value outside.”

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