In a dramatic turn of events, the United Kingdom finds itself in the midst of an economic crisis as the value of its currency, the pound, experiences an unprecedented drop. What was once a symbol of stability and strength on global financial markets has now become a cause for concern and uncertainty. The alarming decline in the value of the pound has sent shockwaves through various sectors, from businesses and investors to consumers and policymakers alike. As the nation grapples with this unexpected setback, experts are scrambling to understand the underlying factors behind this sudden plunge and its potential ramifications for both domestic and international economies.
What’s causing the unprecedented decline in British manufacturing power?
The pound’s value plays a crucial role in determining economic activity within specific sectors as measured by the Purchasing Managers’ Index. When the index surpasses 50, it signifies an economy that is thriving, whereas a value below 50 indicates reduced economic activity and contraction. In contrast to this, the British industrial sector witnessed its most substantial decline since December of last year. Concurrently, there has been continuous decline in growth for three months in the nation’s service sector.
Supply chain disruptions and labour shortages in the UK.
The slowdown in both the services and manufacturing sectors added to concerns that the UK economy is losing momentum as it exposed the impact of various challenges, including supply chain disruptions and labour shortages. The Telegraph wrote that the UK is now a poor country, which the leaders ignore. The newspaper also notes that if the UK were an American state, it would be at the bottom of the state rankings.
A decline in the average standard of living in the UK
The Telegraph, a prominent British newspaper, disclosed that the average quality of life in the UK falls below that of even “low-wealth” states. The publication stated, “Britain has transitioned into a nation with modest prosperity. This is our foremost concern, yet our leaders appear to disregard it. Our median living standards now trail behind those of the least affluent US states. Slovenians are surpassing us, and Poles are in close pursuit.” The newspaper underscored not solely the issue of failing to recognise our diminishing status as a challenge but also the refusal to accept any decline while still upholding the claim of being a prosperous nation.
Factors of relative poverty in the UK
The Telegraph explained that the causes of relative poverty in the UK go back to March 2009, when the Bank of England increased the amount of money in circulation by around 50%, leading to an accelerated depreciation of the value of the pound and increased government spending and borrowing. This newspaper also wrote that housing prices have increased by 450% since 1971, higher than any other country in the Organization for Economic Cooperation and Development. At the same time, the daily government spending ratio has increased from 27% in 2000 to 44% and will soon exceed 50%.
The recession of British factories in recent months
UK factory slump deepens in June on lower spending. A survey showed that the pace of UK manufacturing contraction accelerated in June, with optimism dampened as price pressures eased. The Purchasing Managers’ Index fell to 46.5 from 47.1 in May, the lowest this year and one of the weakest readings since the financial crisis of 2008-2009. This was the 11th consecutive month below the threshold of 50 growth. Headline inflation in the UK last month rose to a 31-year high after rising from 6.8%, the highest rate since 1992, according to the Office for National Statistics (ONS).
The impact of domestic and export market conditions on producers
Commenting on the situation, Rob Dobson, an S&P Global Market Intelligence director, noted, “Manufacturers are grappling with unfavourable conditions in both the domestic and export markets. Clients exhibit higher hesitancy towards investment due to market unpredictability, heightened competition, and increased costs.” Factory expenditures on materials and energy saw the most substantial drop since February 2016, accompanied by producer prices experiencing their first decrease since April 2016. Recent authoritative data revealed that UK factory production in April was 0.9% below levels observed a year earlier. This constitutes the most gradual annual decline since January 2022.
The UK is the only country in the G7 with increasing inflation.
Based on data from the Organisation for Economic Cooperation and Development (OECD), the United Kingdom is the sole G7 nation witnessing a rise in inflation. The OECD indicated that the annual inflation within the Group of Seven countries decreased from 5.4 per cent in April to 4.6 per cent in May, marking its lowest point since September 2021. Notably, the National Consumer Price Index of the OECD for the UK encompasses housing ownership and living expenses, rendering it the most extensive metric for assessing inflation.
Rising consumer inflation in the UK
UK consumer inflation for all items rose 7.9% year-on-year in May, higher than in April. At the same time, many major central banks are thinking of ending interest rate hikes by reducing prices and even with high inflation rates. The Bank of England last month raised interest rates by 0.5 per cent to 5 per cent, a bigger-than-expected increase. The 13th consecutive interest rate hike has increased the base rate since 2008.
Intensification of political inflammation in the crisis economy of the UK
To curb inflation, the UK government has prioritised two goals, including suppressing the profit-seeking activities of companies and reducing the share of public sector salaries. British Prime Minister Rishi Sunak announced on June 25 that he might take unusual steps to reject the recommendations of independent bodies and reconsider the budget to cut public sector wages again. The current actions of the UK government alongside the Bank of England signal a new tactic with a two-pronged attack on stubborn UK inflation.
The Bank of England raised interest rates to the highest level.
During the last week, the Bank of England increased the interest rate by another 0.5%, bringing it to the highest level in the previous 15 years, i.e. 5%. This increase has been unprecedented in the last few months and was applied in response to the fourth consecutive inflationary shock. After announcing another interest rate hike, Bank of England Governor Andrew Bailey said British businesses should pull back from trying to boost profit margins and that workers’ demands for higher wages needed to be curbed.
The political cost of Sunak to curb inflation
Sunak admits that curb inflation may cost him politically. Ignoring the recommendations of wage review bodies will lead to more strikes. The UK has lost 4 million working days due to strikes since the beginning of this year, the highest number since 1990. Sunak says there is no benefit in doing things that please people and their tastes. Increasing public sector salaries will only result in higher inflation and interest rates. Currently, only things that the government can handle can be carried out. Although these measures may be limited in the short term, the country needs them.
