British political stability is under threat

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The British economy, which is the sixth largest in the world, has stagnated since the 2016 referendum on leaving the European Union (Brexit). Due to the outbreak of the COVID-19 pandemic in 2020, the situation worsened: GDP fell by 2.2% in the first quarter and 20.4% in the second, with an annual loss estimated by the IMF at 9.9%, the country’s biggest recession since World War II. Despite the government’s efforts to support the economy, business investment and household consumption have declined. According to IMF forecasts for April 2021, a rebound is expected in 2021 (+ 5.3%) and 2022 (+ 5.1%), in part thanks to the long-awaited last-minute trade agreement signed between the United Kingdom and the European Union, which finally defines the new terms of the UK-EU relationship and cooperation after Brexit. The EU-UK trade and cooperation agreement is currently in draft form.

The measures taken by the government to support employees and the self-employed have made it possible to contain the rise in the unemployment rate, estimated at 4.5% in 2020 (against 3.8% the previous year). However, due to the slow recovery in 2021 and the end of government support, unemployment is expected to rise in 2021 to 6.1% (IMF). The rate is higher for young people aged 16 to 24, at 14.5% over the period August-October 2020 (compared to 12.1% in the pre-pandemic quarter of January-March 2020 – ONS). The country’s GDP per capita (PPP) is estimated at 48,698 by the World Bank (latest data available), but the UK’s relatively strong macroeconomic performance masks weaknesses and situations of inequality. Thus, as the IMF has underlined, strengthening human capital is a key priority. Government efforts to invest in infrastructure, increase the supply of housing and increase women’s participation in the labor market will also help support more sustainable and inclusive growth.

The budgetary efforts undertaken in recent years have been compromised by the emergency measures that the government has had to put in place to combat the crisis induced by the epidemic, in particular partial unemployment schemes, subsidies for the self-employed, grants and tax breaks for businesses and additional funding for the NHS, totaling over 10% of GDP. Combined with lower revenues, the general government balance fell to around 0.5% in 2020, as the debt-to-GDP ratio skyrocketed to 103.7%, from 85.2% a year earlier (IMF) . While public debt is expected to maintain an upward trend over the medium term (107.1% this year and 109.1% in 2022), the budget deficit is expected to gradually narrow (-5% and -4.8%, respectively). Due to low energy prices and consumer spending, inflation remained subdued at 0.9%, well below the Bank of England’s 2% target, but is expected to gradually recover to 1 , 5% in 2021 and 1.9% the following year.

Summary of the news:

  • British political stability is under threat
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