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The British economy is in recession and will be hard-pressed to grow even when the recession ends, the Bank of England (BoE) said this month in one of its most dismal forecasts on record.

This year, economic growth of even just 0.7 percent could reignite inflation, the bank warned, adding that the economy will not climb back to pre-COVID levels until 2026.

Instead, the bank forecasts a 1-percent economic contraction through the first quarter of 2024. 

By 2025, the economy will eke out 0.7-percent growth, barely a third of the 1.7 percent it averaged from 2009 through 2019, the BoE predicts. 

The bank’s view foretells “the weakest 20-year period of growth since 1938” for Britain, according to the nonprofit Resolution Foundation, which seeks to improve the economic fortunes of the U.K.’s low-income earners.

“Since the start of the [COVID era], we have seen a large increase in the number of people who do not take an active part in the labor market,” BoE governor Andrew Bailey told a press briefing last week. 

“This significant and lingering fall in the labor supply weighs on the U.K. economy’s potential,” he added.

Other factors bogging down the GDP include lagging productivity and unresolved post-Brexit trade chaos with Europe. (See “Brexit Damage Has Set In Sooner Than Expected” in this issue.)

Britain’s economy is likely to grow the least of any G7 country this year, the BoE has said.

Inflation ran at 9.2 percent in December, prompting the central bank to jack its key interest rate by a half point last week, despite households struggling in the worst cost-of-living squeeze in generations.

At least one more rate increase is in the offing, Bailey said.  

Prime minister Rishi Sunak has promised to cut inflation by half and revive the economy before 2025. However, BoE projections show scant growth through 2024, leaving an additional 500,000 people jobless. 

“There appears to be increasing detachment among those who have left the labor market,” the Bank said in its quarterly Monetary Policy Report. 

“Over 80 percent of working-age people who are inactive state that they do not want a job, almost 3 percentage points higher than before the pandemic. These people are unlikely to re-enter the labor force,” the report stated.

The U.K. is the only major industrialized nation in which “the fall in [labor market] participation in [the COVID era] has not reversed course,” Bailey noted. 

Pre-COVID, British productivity grew by an average of 2 percent annually.

However, that growth was due to mass immigration, changes in benefit schemes that encouraged more people to work, and more people working into their later years.

Those factors have now disappeared, Bloomberg reported. 

“Since 2016… lower net migration from the European Union has only partially been offset by higher migration from outside the EU,” the BOE report said, and the population as a whole is growing older. 

“There is an increase in the part of the population that, when asked why they are not returning to the [labor] market, cites long-term health conditions,” Bailey said. “I don’t think that’s the proximate reason for leaving the labor force. So it’s important we know a lot more about why this is happening and what can be done to reverse it.”

TREND FORECAST: As we wrote in “Brace for Longest U.K. Recession Ever” (8 Nov 2022), the world economy faces a domino effect.

Britain’s recession will drag down Europe’s economy; the two remain close trading partners, despite the post-Brexit mess. 

Because China has become Europe’s chief supplier of imports, the Eurozone’s economic tailspin will worsen China’s slowdown.

China and the U.S. are each other’s main trading partners overall. China’s weakness will damage U.S. GDP and sharpen the risk of recession.

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