Why UK May Take the Biggest Hit As Recession Fears Threaten G7 Economic Stability

By 11.15.22February 6th, 2023No Comments
Why UK May Take the Biggest Hit As Recession Fears Threaten G7 Economic Stability

Small and medium sized business progress has been hampered as the number of people in work has failed to recover to pre-Covid levels.

Unfortunately, the GB economy shrank in the three months to Sept whilst every other nation in the G7 managed to grind out some form of growth.

Of course, there are mitigating global factors in all of this – inflation is sweeping throughout the world, Russia’s war has provoked an energy crisis across Europe and interest rates are soaring as the cheap idolized debt of the post financial crisis years fast evaporates. Yet the UK has found itself at the very forefront of the crunch.

GDP fell by 0.2% in Q3, the first drop in what many fear is likely to be a prolonged recession. Yet by contrast, US, Canada, Germany, France and Italy all managed to grow over the same period with Japan expecting too to report a modest expansion later this week.

On a quarterly basis, the UK has yet to return to its pre-pandemic level of GDP unlike the rest of the G& group. If GB output falls again in the final quarter, as expected, it will be the fastest return to recession since 1975.

Why is Britain having a tougher time? One factor is the labour market.

On the face of it, our job market looks to be in a strong position. Unemployment is at a low not seen since the 1970s. There are more vacancies on offer than there are job seekers.

However, despite the demand for staff, the number of people in work has failed to recover to pre Covid levels.

Employment stalled at around 34m people in the summer, stopping short of the 34.4m peak reached in the three months to Feb 2020. Almost 9m people of working age are now classed as economically inactive, i.e. neither in work, nor looking for work- a rise of more than 600,000 since the pandemic. This includes as increase in early retirement and a sharp jump in long term sickness. By contrast the employment rate has increased in France, Italy, Germany, Japan and Canada when compared with the end of 2019. Skill shortage isn’t unique to the UK, but unfortunately the inactivity level is. France and Germany for instance are seeing reduced inactivity rates.

So, is the inactivity rate specific to the UK? One explanation is that the crisis in the NHS seems to be unique to the UK in terms of how acute the waiting list for patient treatment is.

A shortage of workers leaves businesses unable to expand as they require, impacting the progress of the economy. Those who can, are having to lure workers with offers of higher pay.

The tighter jobs market is one factor pushing the BOE to raise interest rates more quickly than its Eurozone counterpart, as policymakers seek to avoid a dangerous wage-price spiral that could seriously embed inflation.

This also impacts on Britain’s economy by making borrowing to invest more expensive. The impact of higher debt servicing costs and the fallout from the housing market correction are key factors pointing towards a forecast of a sharp fall in GDP next year.

Another factor is the unstable policy environment and the turmoil of recent political volatility with U-turns and back tracking on promises, which take corporate tax for example has dissuaded firms from properly planning for their investments and training of staff.

GB’s fall into recession does not mean the rest of Europe will remain unscathed as the UK is altogether comparable due to heavy gas reliance with many forecasters agreeing that many of the hardest hit European countries especially Germany will suffer a recession as deep and prolonged as the UK.

Bryn Ible, Regional Managing Director at eCapital Commercial Finance explains, “The UK is facing up to a prolonged period of challenge and discourse amidst a catalogue of external economic and political pressures. For many businesses the outlook remains demanding and uncertain. We will however continue to look to support the funding needs of our clients in every way we can to help them navigate through these testing times.

For now, the UK’s economic fate still hangs in the balance and much depends on the future of the energy price guarantee, how it is managed longer term and the scale of tax rises and spending cuts at the Chancellor’s forthcoming Autumn Statement.

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eCapital Commercial Finance (eCapital) is a leading invoice financier providing funding facilities up to £3m to support the growth of SMEs through the provision of flexible working capital facilities. The business has grown significantly since its launch in 2001, providing over £4 billion of funding to businesses. It is majority owned by eCapital, a US based financial services business with interests in the USA and Canada.

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