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

The UK economy has no places to look for a good news story as its economy continues to grapple with inflation while its European neighbors leave rising prices in the back burner. This is now likely to impact the country’s growth prospects.

The Organization for Economic Co-operation and Development (OECD) released its latest forecasts for developed countries on Thursday, and it was not pleasant reading for the UK.

The country was one of the few countries where the organization lowered its forecasts, and is now expected to grow by 0.4% instead of 0.7% previously.

While its economy is still expected to grow faster than Germany, which is expected to expand by just 0.2% this year, the UK is losing more ground to the eurozone, which is expected to grow a combined 0.7% in 2024. .

It’s the latest worrying data point for the UK, which has been struggling to shake off high inflation and is still feeling the effects of damage to its reputation from the 2022 budget crisis.

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

“Think of Europe, but everything is a little worse,” is how Eisenschmidt describes the UK’s current economic situation.

This is the sentiment that emerged in the latest OECD forecasts, and which has left the country’s decision-makers in an awkward position.

Eisenschmidt says the UK’s central bank, the Bank of England, is expected to be slower than the European Central Bank in delivering interest rate cuts to stimulate growth.

The UK experiences more difficult inflation than its European counterparts. Prices rose 2.4% in the euro zone in April, while the UK CPI in March averaged 3.4%, putting the former on a faster path to rate cuts.

The source of this steady inflation is up for debate, Eisenschmidt said. However, the blame can be blamed on the UK’s escalating unemployment crisis

The country’s economic inactivity rate has risen, and the pace of economic inactivity has accelerated due to the increasing long-term disease trend Youth unemployment.

The country has been unable to take advantage of migration flows to compensate for the tight labor market, unlike the European Union’s common market.

As a small open economy, the UK was also more vulnerable than the EU to capital flight following market shocks, as summarized by the September 2022 hard currency budget.

Eisenschmidt said these pressures made the UK “more vulnerable to the need for family discipline” in the short term.

The outcome of this year’s UK general election, for which a date has not yet been set, represents another major short-term variable affecting the fortunes of the economy.

Population aging

The trend of labor market flows having a significant impact on economic performance is something the UK will have to get used to.

Eisenschmidt said that developed European countries share a common threat of population aging. As demographics age, advanced economies are expected to experience labor shortages, exacerbated by the need for labor to care for older citizens.

As Eisenschmidt points out, countries will become increasingly more dependent on immigration from younger countries to fill labor market gaps.

However, the UK has gained a reputation for being inward-looking in recent years. The country voted to leave the European Union in 2016 in a debate that focused largely on immigration levels from elsewhere in the EU.

Domestically, one of the issues in recent months has been the government’s controversial plan to deport asylum seekers to Rwanda.

Despite this, total immigration to the UK has risen continuously since the UK’s vote to leave the European Union. However, net migration declined as more people left the country after the vote.

However, the silver lining for the country is that despite its stance on immigration, Eisenschmidt says the UK still looks like one of the best places for foreign residents.

“One of the key measures of long-term success or relatively less decline is your ability to attract immigrants and integrate them into the workforce.

“I would say here that, in my view, the UK is not so bad, simply because of the language and the great educational institutions that have great brand value abroad.”

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