The Current State of the UK Economy

 The UK economy is facing a challenging period as it recovers from the impact of the coronavirus (COVID-19) pandemic and adjusts to new trading arrangements with the European Union (EU). This article provides a brief overview of some key indicators of the UK economy, based on the latest available data.

GDP growth

Gross domestic product (GDP) is a measure of the economic output produced by a country. Real GDP is GDP in constant price terms; that is, GDP adjusted for price changes.

According to the Office for National Statistics (ONS), the UK economy will grow by 0.4% in the third quarter of 2023 (July to September), following a revised 1.6% growth in the second quarter (April to June). This was below market expectations of 0.6% growth and marked the slowest quarterly expansion since the first quarter of 2021.

The ONS attributed the slowdown in growth to weaker consumer spending, partly reflecting supply chain disruptions and higher inflation. Business investment also fell by 0.2% in the third quarter, reversing a 4.8% increase in the previous quarter. On the positive side, net trade contributed 0.5 percentage points to GDP growth, as exports of goods and services rose by 2.3% while imports fell by 2.8%.

On an annual basis, the UK economy is predicted to grow by 7.5% in the third quarter of 2023, compared with the same quarter a year ago, when it contracted by 9.6% due to the lockdown measures imposed to contain the spread of COVID-19. However, the predicted level of GDP in the third quarter of 2023 was still 1.9% below its pre-pandemic peak in the fourth quarter of 2019.

Inflation and Interest Rates

The inflation rate measures the rate at which the average prices of goods and services change. The Bank of England is responsible for price stability in the UK and has a target of 2% for the annual inflation rate as measured by the Consumer Prices Index (CPI).

According to the ONS, the CPI inflation rate rose to 5.1% in November 2022, up from 4.2% in October and above market expectations of 4.9%. This was the highest inflation rate since September 2011 and well above the Bank of England’s target.

The ONS attributed the rise in inflation to higher prices for a range of goods and services, including fuel, food, clothing, household goods and recreation. The ONS also noted that some of the increase was due to base effects, as prices were lower a year ago due to temporary discounts offered by some retailers and service providers during the lockdown.

In response to rising inflation and expectations of further price pressures, the Bank of England raised its main interest rate by a quarter-point to 0.5% in December 2022, following a similar increase in November. This was the first time that the Bank of England raised interest rates twice in consecutive months since 1997.

The Bank of England said that it expected inflation to peak at around 6% in April 2023, before falling back towards its target over the next two years. The Bank also said that it would continue to monitor economic developments and adjust monetary policy as necessary to achieve its objectives of price stability and supporting growth and employment.

Balance of Trade

The balance of trade is the difference between the value of exports and imports of goods and services. A positive balance indicates a trade surplus (exports exceed imports), while a negative balance indicates a trade deficit (imports exceed exports).

According to the ONS, the UK recorded a trade deficit of £1.9 billion in goods and services in November 2022, narrowing from a revised £3 billion deficit in October. This was mainly due to a lower deficit in goods trade, which fell from £14 billion to £12 billion, as exports rose by 3.5% while imports increased by only 0.8%. The surplus in services trade remained stable at £10 billion.

The ONS said that trade with both EU and non-EU countries improved in November, with exports rising faster than imports for both groups. However, trade with non-EU countries accounted for most of the improvement in goods trade, as exports increased by 6.1% while imports fell by 1%. Trade with EU countries saw smaller changes, with exports rising by 0.8% and imports increasing by 2%.

The ONS also noted that trade data were subject to more uncertainty than usual due to data collection changes following Brexit and COVID-19 related issues affecting international trade flows.

Supply Chain Issues

Supply chains are networks of organisations that produce, distribute and deliver goods and services to customers. They are essential for economic activity but can be disrupted by various factors such as natural disasters, geopolitical conflicts, labour shortages or regulatory changes.

The UK has faced several supply chain challenges since the start of the COVID-19 pandemic and Brexit transition period. These include:

• Delays at ports due to increased border checks and paperwork requirements;
• Shortages of lorry drivers due to reduced migration flows and skills gaps;
• Higher transport costs due to global demand for shipping containers and fuel;
• Reduced availability of raw materials and components due to production disruptions or export restrictions; and
• Increased demand for certain products such as personal protective equipment or home improvement items.

These supply chain issues have affected various sectors such as food and drink, construction, manufacturing and retail. They have also contributed to higher inflation, lower output and reduced consumer choice. According to a report by Highways Today, there are seven main issues affecting supply chains in the UK in 2023:

1. Public procurement changes: The new Procurement Bill aims to simplify public procurement rules and make them more flexible and transparent;
2. Building Safety Act reforms: The new legislation introduces stricter standards for building safety and fire risk management;
3. Environment Act targets: The new law sets legally binding targets for environmental improvement such as air quality, biodiversity and waste reduction;
4. Global focus on supply chain due diligence and ESG: There is increasing pressure from regulators, investors and consumers for businesses to ensure their supply chains are ethical, sustainable and resilient;
5. Increasing awareness of social value: There is growing demand for businesses to demonstrate how they contribute to social outcomes such as employment, health and wellbeing;
6. Ongoing challenge of materials and labour shortages: There is still a lack of availability and affordability of key materials such as steel, timber and cement; and
7. Closer scrutiny of materials suppliers: There is more attention on how materials are sourced, processed and transported.

To cope with these supply chain issues, businesses need to adopt various strategies such as:

• Diversifying their sources of supply or finding alternative materials;
• Investing in digital technologies such as cloud computing or blockchain;
• Collaborating with other businesses or organisations across their supply chain network;
• Improving their forecasting and planning capabilities;
• Enhancing their visibility and traceability across their supply chain; and
• Adopting circular economy principles such as reducing waste or reusing materials.

Trade Finance Data

Trade finance is a form of financing that facilitates international trade transactions. It can involve various instruments such as letters of credit, bills of exchange or export credit insurance. Trade finance data can provide insights into global trade flows and trends. According to data from SWIFT,  a global provider of financial messaging services, global trade finance volumes increased by 7% year-on-year in November 2022.

The data also show that:

• The UK was among the top five countries for both issuing ($11 billion) and receiving ($10 billion) letters of credit (LCs) in November 2022;
• The UK’s LC (letter of credit) activity increased by 13% year-on-year in November 2022;
• The UK’s main trading partners for LCs were China ($3 billion), India ($2 billion) and Germany ($1 billion); and
• The UK’s main sectors for LCs were machinery ($3 billion), chemicals ($2 billion) and metals ($1 billion).

Compared with comparable data from November 2021, these figures indicate that:

• The UK’s share of global LC activity increased slightly from 5% to 6%
• The UK’s LC activity grew faster than the global average (13% versus 7%)
• The UK’s main trading partners for LCs remained unchanged
• The UK’s main sectors for LCs shifted slightly from machinery ($4 billion), metals ($2 billion) and chemicals ($1 billion)

According to data from Euler Hermes, a leading provider of export credit insurance solutions, global trade credit insurance claims increased by 18% year-on-year in October-November 2022.

The data also show that:

• The UK ranked fourth among countries with highest claims volume ($120 million) after France ($200 million), Germany ($180 million) and Italy ($140 million);
• The UK’s claims volume increased by 20% year-on-year in October-November 2022; and
• The UK’s main sectors for claims were construction ($40 million), automotive ($30 million) and textiles ($20 million).

Compared with comparable data from October-November 2021, these figures indicate that:

• The UK’s share of global claims volume decreased slightly from 7% to 6%;
• The UK’s claims volume grew faster than the global average (20% versus 18%); and
• The UK’s main sectors for claims changed significantly from food ($50 million), automotive ($40 million) and construction ($30 million).

These trade finance figures suggest that the UK’s trade activity has been resilient despite the supply chain disruptions and inflationary pressures. However, they also indicate that the UK’s trade risks have increased, especially in sectors such as construction and automotive that rely heavily on imported materials and components.

In Summary

The UK economy is recovering from the impact of COVID-19 but faces headwinds from supply chain challenges, higher inflation and new trading arrangements with the EU. Predicted GDP growth slowed down in the third quarter of 2023 but remained positive on an annual basis. Inflation rose to its highest level in a decade and prompted two consecutive interest rate hikes by the Bank of England. The trade deficit narrowed slightly in November as exports outpaced imports. Supply chain issues have affected various sectors such as food and drink, construction, manufacturing and retail. Trade finance data show that the UK’s trade activity has been resilient but also risky. To cope with these challenges, businesses need to adopt various strategies such as diversifying their sources of supply, investing in digital technologies, collaborating with other businesses or organisations across their supply chain network, improving their forecasting and planning capabilities, enhancing their visibility and traceability across their supply chain, and adopting circular economy principles.