April 23, 2024

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High inflation and interest rates in the UK – how do other economies compare?

High inflation and interest rates in the UK – how do other economies compare?
  • By Dharshini David
  • Global Trade Correspondent, BBC News

image source, Getty Images

Inflation is still higher in the UK than in many other rich countries, so interest rates may remain higher for longer.

So how does the UK fare in other parts of our economic well-being? Include growth, jobs, and taxes and the picture will be mixed.

economic inflation

For all the talk of low inflation, it still means prices are 7.9% higher in the UK than they were a year ago. In the European Union, this rate is 5.5%, and it is lower in the United States at 3%.

Britain has seen the worst of the two source of price shocks affecting rich countries – energy and food price hikes last year due to the war in Ukraine, and a labor shortage after the pandemic.

Like the EU, the UK buys a lot of energy – but the effects of the downturn in wholesale gas prices are taking longer to show in our inflation numbers

This is due to the subsequent introduction of energy subsidies and price movements which take some time to be reflected in the local billing cap here.

But so-called “core” inflation, a measure that excludes energy and food, remains near its highest rate in 30 years. This suggests that there is still strong spending on non-essential items, and sweets, with some people using stash savings during the pandemic, or due to wage increases.

interest rates

But we are not alone. Rates of new mortgage deals have increased in many other countries over the past 18 months.

But the effect varies. In the United States and some of Europe, fixed-rate mortgage deals tend to typically last 25 or 30 years. In some cases, mortgage holders can switch deals with less penalty. The French government is also effectively capping rates, so a new 30-year mortgage deal could cost 3.5%. Mortgage rates in America are close to 7%.

It’s helpful to compare effective rates – the average across existing and new home loans. According to the latest published calculations, in the UK, where the majority are on fixed two- or five-year deals, this is just under 3% (although that will rise as more loans are refinanced). In France and Germany it is less than 2%.

Although inflation has slowed here, the Bank of England is still expected to at least raise interest rates again – and they may stay high for longer than in the EU or the US.

When it comes to growth, Chancellor Jeremy Hunt chooses to highlight that since 2010 the UK has expanded faster than France, Japan and Italy.

But many experts are comparing what economies were like before the pandemic. By the spring of his year, Germany and the UK were the only two G7 countries that still had economies smaller than they did at the end of 2019, according to quarterly official figures.

But in 2023, the UK is more resilient than some expected.

Growth may have been flat, but consumer spending has kept getting better – those higher wages and pandemic savings again. It was, in fact, the eurozone that slid into recession in the early part of this year.

But higher interest rates are slowing down, which takes some time to become apparent. There is now concern among some economists that we may see the UK slip into recession – and others with it.

But we have to keep playing catch-up.

The unemployment

Despite the ravages of Covid and high interest rates, our job market hasn’t been doing too bad. The UK’s unemployment rate, at 4%, is lower than that of the European Union, although it is higher than 3.6% in America.

But there is a lot to the picture.

To be considered unemployed, people must be available for work and looking for a job. Those who are not are considered inactive. It is rare that the UK is one of the few rich countries where there are many more people inactive than before the pandemic, and hundreds of thousands more, especially as the number of long-term patients rises. The Organization for Economic Co-operation and Development ranks the UK at the bottom of the G7 for labor force participation rates (the proportion of people employed or looking for work).

But as these interest rates increase, unemployment can also rise.

tax

It is not just inflation and rates that affect fortunes. Those who earn salaries or run businesses may have noticed higher tax bills.

The proportion of our nation’s income, gross domestic product, paid to a taxman is currently set to reach a postwar record of 37.7% by 2028.

Has the feeling changed in a nutshell? Our so-called tax burden was actually lower than the European Union average, although it is higher than that in the United States according to the most recent comparable figures. The tax man in France already receives 45 cents for every euro made in the economy there.

But most countries will face increasing pressures on their public finances, thanks to aging populations and existing debts.

It has been a difficult few years in all respects but there are some areas where the UK may feel particularly short of change.