UK in Deep Trouble - Wage Spiral, House Price Crash, Brexit, GDP, Inflation, Interest Rates

Hi, welcome back to Joe blogs. In today's episode I want to provide you with an update as to what's happening in the United Kingdom economy. The United Kingdom is the sixth largest economy in the world and the second largest in Europe, and therefore has an important role to play in the global economy. But the UK is an island and, despite having its own natural gas and oil reserves, it's a net importer of Energy Products and as a result of that, over the last couple of years the UK has experienced high levels of inflation, and in order to try to bring down inflation, the authorities have increased interest rates rapidly over the course of the last 15 months or so. Show more

And the combination of high prices, rising interest rates and the impact of brexit- the United Kingdom leaving the European Union- has had a devastating impact on the economy. So in today's episode we'll have a look at what's happening with inflation, interest rates, wages and unemployment in the UK, will review the latest data for house prices and mortgage rates, because the UK has high levels of home ownership and a lot of people have large mortgages and the recent rapid increase in interest rates is now causing major pain for a lot of those people. Show more

We'll have a look at what's going on with regards to GDP and whether or not the UK is officially in recession, and then, finally, today I'll wrap up with my summary- so what I think is likely to happen in the UK over the course of the next three to six months and what the impact of this will be for the global economy. Show more

This shot shows the movement in the rate of inflation for the United Kingdom over the course of the last five years, and the reason I'm showing it over this scale is that the target rate of inflation for the United Kingdom has been set at two percent, and if you follow the channel, you'll know that we've discussed this a lot. The reason that governments set a Target rate of around two or three percent is that some growth in prices is seen as being healthy, because that enables companies to be able to pass on price increases in terms of all the raw materials that they're buying in and also to be able to pay their staff wage increases and, as you can see from this chart, in 2019 and the first part of 2020, inflation was running at or around that Target rate of two percent. In 2020, inflation started to fall as a result of the impact of the covid-19 pandemic, when we saw a lot of businesses close down and the level of activity in the United Kingdom fell. However, in 2021, as the lockdown restrictions were released, we saw a rapid rise in the rate of inflation, and this was due to a combination of fact factors. Firstly, there was the pent-up demand. Everybody had been sitting at home, unable to actually do anything, so, once all of the restrictions were released, everybody wanted to go out and spend, so we saw a huge increase in demand and, at the same time, there was limited Supply because a lot of companies had closed down their operations and so there wasn't a lot of stock. So we had a situation where demand exceeded Supply and, as I'm sure you'll be aware by now, when you have a situation like that, it causes an increase in prices. And to add further fuel to the fire, in February 2022, Russia invaded Ukraine, which threw a huge question mark over the global supply of energy and food products, because Russia was a major supplier of both to Europe and the rest of the world, and as a result of that, we saw a huge spike in a lot of commodity prices, which led to a further increase in inflation in the United Kingdom, and you can see from the chart that by the second half of 2022, inflation had risen to more than 10 percent in the United Kingdom. Show more

Now, if we zoom in and have a look at what's happened to inflation over the course of the last 12 months, you can see that between August 2022 and March 2023, inflation remained persistently high, above 10, and the first time that the UK saw a marked reduction in inflation was in April, when it fell to 8.7 percent, remained at 8.7 percent in May, fell to 7.9 in June and in July 2023 there's been a further fall to 6.8 percent. Show more

So obviously what we are seeing here is a downward Trend. However, the problem for the United Kingdom is that the current rate of inflation of 6.8 percent is still around 3.5 times higher than the target rate of 2 percent, so this is not the end of the road for the UK. The United Kingdom authorities need that inflation to get down to two percent and therefore the bank of England will continue increasing interest rate until it hits that Target level. And if we compare the current inflation rate of 6.8 percent against the other economies of the G20, which are the 20 largest economies in the world, you can see that there are only three countries that have a higher rate of inflation. Show more

Currently, the rate of inflation Argentina is now 113, which is completely off the scale, and if you're interested in finding out what's going on in Argentina, check out the videos that I've been posting. The rate of inflation in Turkey is almost 48, and turkey continues to be an economy in crisis. It's sitting on the verge of collapse now. Interestingly, the Third Country on this list is India, where the current rate of inflation is over 7.4 percent, and you can see that there's been a marked increase in inflation over the course of the last month, and it will be really fascinating to see whether this is now an upward trend for India and what the implications of this will be for the growth of the Indian economy. But you can see from this child that the United Kingdom currently has the fourth highest rate of inflation out of all of the countries in the G20 and, interestingly, has a higher rate than Germany, which is officially in recession right now, and I think it's interesting to note that, despite the fact that interest rates in the United Kingdom are currently 5.25, which is broadly in line with the United States where it's 5.5 percent, and Canada, where it's five percent, the current rate of inflation in the UK is 6.8 percent, compared to 3.3 percent in Canada and 3.2 percent in the United States, and, as we've just discussed, the implication of that for the UK is that it's very likely that there are more interest rate increases to come. Show more

Now, one of the areas that I always like to have a look at when we're talking about prices is what's happening to food prices, and this chart shows the movements in food inflation in the United Kingdom over the course of the last five years and, as you can see from the shape of this chart, it's very similar to what we looked at for General inflation. Show more

However, the levels are somewhat higher. Back in 2019 and 2020, food prices were moving broadly in line with the bank of England's expectation on inflation at around two or three percent. Prices actually fell year on year at the end of 2020 and the start of 2021. However, since the middle of 2021, we have seen a rapid increase in food prices in the United Kingdom, and it's interesting to note that those increases in prices actually started accelerating in the second half of 2022 and hit a peak of 19 in March and April 2023, and if you look at the latest release figures for July 2023, you can see that food inflation has increased year on year by 14.8 percent, which is significantly higher than the overall inflation level of 6.8 percent, and, as we've discussed many times before on the channel, this is a problem for the poorer members of society. Show more

If you're on a lower income, you will spend a proportionately higher amount of your monthly earnings on food, because it's a basic requirement, it's a necessity. You have to pay for food and unfortunately, food prices are indiscriminate. They are the same for everybody, whether you are rich or poor, and although the United Kingdom is a first world economy, so people are not starving to death on the streets. An annual increase of 14.8 percent is putting a lot of pressure on many families in the UK right now, and the UK authorities and the bank of England are focused on trying to bring food inflation down, and the way that they're going to try to do that is by continuing to increase interest rates. Show more

During periods of high inflation, there is usually strong demand for increases in wages. As the cost of living Rises, people need to be paid more in order to maintain their standard of living, and this chart shows the year-on-year movement in wages in the UK over the course of the last 12 months, and what this shows is that there has been a significant increase in the annual increase in wages, and if you've been following the mainstream press, you'll be aware that the UK has suffered from significant strike action over the course of the last 12 months. Public sector workers such as train drivers, London Underground drivers, teachers, University lecturers, doctors, nurses and Airport staff have all come out on strike at various times and caused major disruption in the economy, and, of course, that disruption has a further negative impact on the UK's GDP and so makes matters worse. But the reason that people have been striking is because of the high levels of inflation that we've just looked at, and particularly think things like food inflation, which have been running in double digits for a long period of time now. As a direct result of that strike action and the efforts of the unions, which are still prevalent amongst public sector workers in the UK, wages have now started to increase significantly, and you can see that the latest released figures for June 2023 show that the annual rate of wage increase is now at 8.2 percent, which, interestingly, is now above the general rate of inflation in the UK of 6.8 percent, and this is now a problem for the UK authorities because there is a lag between negotiating wage increases and the rates of inflation. Inflation is always posted as historic figures. It tells us what was happening to prices last month or the month before. But obviously wage negotiations are a live thing and once wages are increased, they are locked in place for the next 12 months. So what we've got in the UK now is a situation where wages are increasing by 8.2 percent, and let's not forget that these are the figures for June 2023. It's likely, given the continued negotiations with all of the unions, that the figures for July 23 could actually be higher than 8.2 percent. Show more

So we've got a situation where wages are now increasing at a very rapid level, moving towards double-digit increases, and the problem that that will cause is that increased wages will lead to increased spending because people have more money, and when we see increased levels of spending, that puts upward pressure on prices and therefore tends to push inflation back up. So we've now got a potentially Vicious Circle being created in the UK where wage increases are coming in at a high level and that could drive inflation up further, and whilst you might be sitting there thinking well, now that inflation is down to 6.8 percent, surely everybody will stop their demands for pay increases, but the problem that the UK has is that a lot of the unions are looking at the average rates of inflation over the course of the last two years and they're trying to use those figures to negotiate pay increases of five, six, seven, eight percent. Show more

And because the unions have been calling strikes for critical Services- things that are essential to the UK economy- it's very difficult for the UK authorities to say no. And, of course, as we've just seen from the food inflation figures, food inflation is still running at around 15 and if you're spending the vast majority of your income on food, then an increase of 8.2 percent still means that you're losing out on a relative basis. And in order to put the increase in wages in the UK into context, this chart shows the latest movements in wages for the countries of the G20 that release this information and, as you can see, at 8.2 percent, the increase in wages in the UK is the second highest in the G20. Show more

The only country that has a higher rate of wage increases currently is Russia, at 13.3 percent. The two next highest countries are Spain and the United States, where pay increases are currently running at around six percent, followed by Argentina at 5 point seven percent, but obviously inflation in Argentina is running at 113, so 5.7 represents a drop in the bucket. We've then got the Netherlands at 5.7. Australia and Canada are 3.6, Italy 3.1, Japan 2.3 percent, France 1.9, Switzerland 1.8 and in Germany, which is officially in recession right now, the latest movement in wages was a cut of 2.3 percent. So what this table tells us is that the current round of wage increases in the UK are significantly higher than the rest of the G20, and the problem that that's going to cause for the United Kingdom is that it's going to add further fuel to the inflation fire. So you may be asking the question as to why the United Kingdom hasn't done something about this situation. Show more

Why haven't they been increasing interest rates to bring down inflation in the same way as the countries like the USA and Canada? So let's have a detailed look at exactly what's been going on. With regards to interest rates, this chart shows the movement in the official interest rate in the United Kingdom over the course of the last five years, and this shows that in 2019, prior to the covid-19 pandemic, the official rate of interest was 0.75. Show more

Interest rates were then reduced to 0.1 percent in March 2020 following the outbreak of the covid-19 pandemic and remained at those levels until December 2021, when they were increased to 0.25. And since that time we have seen 14 consecutive increases in interest rates to the current level of 5.25. And you can see from the shape of this chart, which basically looks like a very steep staircase, that the bank of England has been increasing interest rates in virtually every single month. It decided that the best form of action was to introduce small increases on a regular basis, and if you take a step back and look at the numbers, since December 2021, rates have increased from 0.1- one percent to five point two- five percent, which is an increase of 52.5 times. And if we compare the current rate of 5.25 with the rest of the G20, you can see that it's broadly in line with the interest rates in the United States, which is currently 5.5, and it's higher than the current rate in Canada, which is 5, the European Union, which is 4.25, and Australia, which is 4.1 percent. So that obviously throws up the question as to why the increase in interest rates in the United Kingdom hasn't had the desired effect of reducing inflation. Show more

This chart shows the levels of home ownership in the UK over the course of the last 10 years, and you can see that the UK currently has home ownership levels of around 65 percent. So that means that around two-thirds of all of the eligible adults actually own their own home, and this is a major thing. In the UK, this is something that everybody aspires towards. Everybody wants to have their own property, to buy their own apartments or house and have a mortgage and live happily ever after, and one of the reasons that everybody wants to buy property is that, on average, over the course of the last 50 years, there has been a huge increase in the value of property. Show more

This chart shows the movement between 1975 and the current levels and you can see that the average price back in the 1970s was sitting at around 100 000 pounds. However, today it's closer to 250 000 pounds. So if you'd bought a property 50 years ago, you'd be sitting on a profit of more than 2.5 times right now. And if we jump back to the home ownership chart, you can can see that over the course of the last few years, there has actually been an increase in the percentage of home owners, and one of the reasons for that is that, between the global financial crisis in 2009 and the end of 2021, the official rate of interest in the UK was less than one percent and that meant that mortgages were very cheap, so people could borrow large amounts of money for very little cost. Show more

But, as we talked about earlier in the video, over the course of the last 15 months or so, we have seen a rapid increase in interest rates in the UK, which has pushed up the price of mortgages, and this chart shows the movements in the average mortgage rate in the UK over the course of the last five years, and this shows that in 2019 and 2020, mortgage rates were very attractive, sitting at or around four percent, and in fact, a lot of deals were available in the Market at less than one percent, which seems crazy. Show more

But the UK has a very different Dynamic to countries such as the United States and Canada. In the UK, the most common form of mortgages or short-term fixed rates, so people lock into a rates for one or two or five years, and the way that the mortgage companies build those rates is that they give you a discounted rate at the front end, so you might be able to get the benefits of a one percent mortgage for two years, which sounds amazing, but at the end of that two-year period, your rates will then convert to a much higher rate, and this is one of the problems that a lot of the homeowners in the UK are now facing. Show more

This chart shows the breakdown of fixed rate mortgages in the UK dating back to the start of 2022, and this shows that in 2022 and 2023, the majority of mortgage deals that were agreed were at less than two percent interest, which indicates that these are short-term fixed deals- one or two years- and if we look at the right hand side of this chart, you can see the number of mortgages that are coming to the end of their fixed rate over the course of the next 18 months. Show more

So a lot of these are at a rate of less than two percent and the majority t or between 2 and 2.5 percent. And if we now jump back and look at what the average mortgage rate in the UK is today, you can see that it's close to eight percent. Show more

So people who have bought property who are currently sitting on a short-term fixed rate of around two percent are going to see an increase in their mortgage costs upon maturity of almost four times, and obviously that is going to be a major problem because the majority of people who have mortgages- their mortgage payments represents the single largest outgoing every single month, and it's unlikely that the majority of mortgage holders will be able to afford an increase of four times in that payment. Most people simply don't have the ability to do that and the problem that we have is that over the course of the covid pandemic, when mortgage rates were very cheap, people took on the maximamount of debt. Everybody geared up because they wanted that beautiful big property and because property prices have been rising rapidly in the UK over the course of the last 20 years or so, everybody thought that this was a no-brainer. But if we now move on and look at what's happening to property prices, you can see that in July 2023, prices actually fell for the first time in a long time in the UK. Show more

So if the biggest mortgage providers in the UK, being the Nationwide and the Halifax, provide monthly statistics, Halifax are estimating that in the 12 months ending July 23, house prices fell by 2.6 percent. However, the Nationwide are estimating that prices fell by 3.8 percent and if you look at the trend, you can see there has been a sharp fall in the level of house prices in the UK over the course of the last few months. And if we extrapolate that Trend forward and think about what's happening with mortgage rates and the unaffordability for all of those people who are coming off fixed rates. There is a very strong chance that we are going to see a major fall in house prices in the UK over the course of the next three to six to 12 months, and that is going to cause major problems. Firstly, existing mortgage holders are going to struggle to be able to pay their mortgages, so we may see a lot of people being forced- sellers- having to sell that property basically to repay the mortgage that they've taken on. Secondly, we're going to see new buyers being very cautious about the levels of debt that they're taking on, because mortgage rates now are sitting at eight percent versus roughly one or two percent a couple of years ago, so that means that they're able to borrow Less in terms of the monthly affordability. And thirdly, in terms of property investors and speculators, it's likely that those people will sit back and wait to see where the market bottoms out. So when you combine all of those factors, the outlook for the property Market is negative right now and for an economy like the United Kingdom where a lot of people have bought property, there's a high percentage ownership rate and the value of those properties has a big bearing on those individuals net worth and their feeling of wealth. It's likely that we're going to see consumers becoming very cautious, spending less, and that will have a detrimental impact on the United Kingdom economy. Show more

This chart shows the UK's GDP figures, which are published on a quarterly basis, for the last three years, and what this shows is that in the second half of 2020, the UK was officially in recession, alongside the majority of the rest of the world, as a result of the covid-19 pandemic. Show more

Now, as I've talked about before on the channel, the recession that was officially recorded back in 2020 was exceptional. The reason for it was that the world stopped. Everybody closed down because we were worried about the health implications. Nobody wanted to go to work, so it wasn't really a genuine recession. This was something that was forced onto most countries around the globe, and if we then have a look at what happened in the second half of 2021 and the first part of 2022, there was a bounce back. As the restrictions were released, everybody went out and started to spend, and so we saw a boom in the economy. However, that boom was relatively short-lived and everybody was brought back down to earth following Russia's invasion of Ukraine, as a result of the huge increase in all commodity prices, and in the second half of 2022, GDP felt a 3.8 and then two percent at the end of the year, and if we look at the official figures for the last three quarters, you can see that the UK is currently struggling. At the end of 2022, the official GDP figure was 0.6, in the following quarter it was 0.2 percent and in the most recent quarter it was 0.4. So basically, at the moment, the UK is seeing virtually no growth whatsoever. Officially, it's not in recession. It's avoided That official title. However, these figures are very poor and show that the UK is on its knees. And to put the current figures into perspective, this chart compares the current rate of GDP in the UK against the rest of the G20 and you can see that the United Kingdom is currently the third worst performing economy, with South Africa and Germany being the only two that it's better than and, as I mentioned before, Germany is currently officially in recession. Show more

So what's the summary and conclusion today? Well, I wanted to post this video, really to give you an update as to what's happening in the UK economy. I'm constantly receiving comments in the section below about people saying: why don't you talk about the UK? Well, if you follow the channel, you'll know that I do talk about the UK, and so this is a regular update, and, as we've seen in today's video, the UK economy is struggling right now. Show more

Over the course of the last 18 months, the UK has experienced high levels of inflation, which is not uncommon. We've seen that in a lot of other economies, but, unlike the other economies, the UK is really struggling to bring that inflation down. Interest rates have risen rapidly- we've seen 14 consecutive interest rates increases- but unfortunately that hasn't had the desired effect, and there are two reasons for that. Firstly, the United Kingdom is a net importer, so it's still having to import large amounts of energy and food, and those prices are still persistently high in the international markets. But also the other factor that we haven't mentioned so far in today's video is brexit. Back in 2016, the UK had a referendto decide whether or not it wanted to continue being a member state of the European Union, and after a very close run vote, it was decided that the UK should leave the European Union. It no longer wanted to be a part of the free trade agreement with the other 27 countries of the EU. Show more

Now, the terms and conditions and the details as to how the UK actually went about exiting from the EU took a very long period of time to agree and actually led to the removal of a number of different Prime Ministers. However, Boris Johnson eventually agreed some sort of deal that nobody really understood and by the end of it, very few people cared about. But the bottom line impact on the United Kingdom economy has been negative, because previously the United Kingdom was able to import lots of food and other products directly from countries such as Germany, France and Spain without having to pay any taxes or duties, but now that the UK is no longer in the European Union, it's having to pay more for all of those goods. Show more

So that is driving up prices and is one of the reasons why the UK is struggling to shake off these high levels of inflation, because its cost base has materially increased on a permanent basis. It can't go back to the old Arrangement. This isn't a short-term impact like the movement in commodity prices we saw following Russia's invasion of Ukraine. This is something that is now a permanent feature of the UK economy. But unfortunately for the United Kingdom and its consumers, the bank of England still has a target of two percent inflation, and the only way that it's going to be able to achieve that is by increasing interest rates further. And, as we've talked about in today's video, one of the side effects of increasing interest rates is that it also leads to an increase in mortgage rates, and the UK has a very high level of home ownership, so a lot, lot of people are sitting there with mortgages, and many of those mortgages are huge. People took on the maximamount of debt during the covid pandemic because debt was very cheap and easy to get hold of, because the government was pumping money into the economy to try to get it moving again and, unfortunately for a lot of the consumers in the UK, they took on short-term fixed rates. So they've got a very attractive deal right now, but that deal is likely to expire at some point over the next three to six to 12 to 18 months, and when it expires, all of those consumers will have to remortgage at a considerably higher rate, potentially three or four times higher than what they're paying now, and for the vast majority of consumers that is completely unaffordable. So there is a real possibility that we could see a property crash in the United Kingdom at some point over the next 6 to 12 to 18 months, because there may be a lot of forced sellers, the there could be people that are defaulting on their mortgages. Show more

We could see a lot of foreclosures Banks actually stepping in and repossessing properties and if that happens, there will be a massive increase in the supply of property in the market and, as we've discussed many times before in the channel, when you get a huge increase in Supply and either stagnant or reducing demand, that is going to bring prices down and unfortunately, from the UK's point of view, a lot of consumers have most of their wealth tied up in their property. So if property prices are falling, that means that people will feel less wealthy, they'll be more cautious and therefore they will spend less. That will reduce demand and therefore potentially could lead to a further contraction in the UK economy and, as we saw from the figures we looked at for GDP, the UK has been skirting just above recession. It's coming in at very minimal amounts of growth. So if we do see a contraction in the economy, that could easily push the UK into recession at some point over the course of the next six to 12 months. So the overall summary of today's video is that what's going on in the UK economy right now is not good. We've got high levels of inflation. We've got rapidly increasing interest rates. The impact of the increase in those interest rates hasn't really fed through fully into the economy yet. As we've discussed before in the channel, it takes around three to six months for the full impact to actually hit people's bank accounts and to change people's buying patterns. Show more

So over the course of the next three to six months it will start feeding through and that's likely to lead to a contraction in spending. So currently things are not looking good for the UK, but the Outlook is potentially worse and, despite the positive noises that are constantly being put forward by the UK authorities, there is a very real chance that the UK could move into recession at some points over the next six to 12 months. So hopefully you found today's episode useful, informative and thought-provoking. If you've liked what I've said, then please give me thumbs up. Thank you for watching this video all the way through to the end, and here's some things about a smile on your face. Show more