London Daily

Focus on the big picture.
Friday, Sep 04, 2026

Why is the UK economy suffering more than other countries?

Why is the UK economy suffering more than other countries?

Up until now it has been difficult to pick out much difference between the UK's economic numbers and those across Europe and the world.

The size of the common global economic shocks from the pandemic and from Russia's invasion of Ukraine has been the overwhelming driver of high inflation and slower growth for most European countries.

But in recent days, the Bank of England governor, Andrew Bailey, has warned inflation is set to be higher for longer here in the UK, and growth in the economy weaker too.

These gloomy forecasts echoed those made by the International Monetary Fund and the Organisation for Economic Co-operation and Development, which has 38 member countries.

On Wednesday, Mr Bailey told a European Central Bank forum that "the UK economy is probably weakening rather earlier and somewhat more than others".

He said: "I think that's been somewhat evident now for a few months."

And on inflation he said that as things stand, he would expect more persistence in the headline rate because of the UK's energy price cap system. This suppressed inflation earlier in the year but raised it later on.

Retailers too have said they have started to expect different outcomes for the UK versus the rest of the Europe. The boss of the owner of Boots, Stefano Pessina, said he suspected the UK "will have a big recession, probably bigger than other European countries".

Last month Pepco, which owns Poundland, said in its results that in the UK customers were scaling back even on essential purchases. Whereas elsewhere in Europe, where wage rises were making up for price rises, this was not the case. Some measures of household consumer confidence are hitting record lows in the UK.

What is driving this? On inflation Mr Bailey pointed to the structure of the price cap affecting the timing of the peaks. But that would affect more the timing of the peak rather than its height.

Sterling has fallen markedly against the dollar over the past year, adding to inflationary pressure for imported fuel and energy. Although the figures are volatile, the key measure of UK trade performance, the current account, reached its worst levels in record in the first quarter.

As the Bank pointed out in its minutes for its June meeting when it raised interest rates, measures of core goods inflation (stripping out volatile measures such as energy and food) in the UK are higher than the US, and markedly higher than the eurozone.

Brexit factor at play


The obvious question posed to Mr Bailey was about a Brexit factor here. Economists predicted that Brexit would make the trade off between inflation and growth more difficult, both because of trade barriers and labour shortages.

If forecasts of UK underperformance turn out to be true, then this would be consistent with a Brexit factor at play, making inflation more stubborn than elsewhere, and perhaps requiring interest rates to be hiked higher.

A smaller pool of workers should mean the UK labour market is now less flexible. The British Chambers of Commerce yesterday implored the government to review urgently its shortage occupation list, as hotels and restaurants turned away clients amid staff shortages.

Post-pandemic challenges


Another mechanism identified by policymakers is that within the UK firms see less competition from Europe, and are increasing margins and therefore prices. On the actual numbers so far, as the governor said, it is difficult to be definitive. The post-pandemic supply chain challenges are difficult to disentangle from post Brexit ones, he said.

Also it is far from certain that these forecasts will come to pass. The German economy is very sensitive to any shortage of energy amid tensions with Russia. The Eurozone itself is under internal pressure again, with risks of a re-emergence of the dormant crisis of a decade ago.

So far, a common energy shock, explains most of the inflation we have seen. The structure of the energy price cap may explain why we have spiked now, later than the rest of Europe. But if over the coming year these inflation numbers stay higher for longer here in the UK than the rest of advanced European and world economies, the shadow of post-Brexit policy changes only really affecting this country will loom large.

Newsletter

Related Articles

0:00
0:00
Close
Scottish Tech Company PureLifi Enters Administration With More Than 40 Job Losses
Scottish Government Names Alyn Smith Innovation and Education Minister
Green Party Co-Leader Zack Polanski to Contest By-Election for Keir Starmer’s Former Seat
Palestine Action Activists Appeal Terrorism-Related Prison Sentences
PwC Report Highlights Persistent Regional Spending-Power Divide Across Britain
UK Names Hundreds of Employers for Minimum Wage Violations
UK Commits £400 Million to International Tropical Forest Fund
UK Extends £2 Bus Fare Cap Across England Through 2027
UK Warns Travellers as US-Iran Tensions Disrupt Middle East Security and Shipping
Andy Burnham Faces Kemi Badenoch in First Prime Minister’s Questions
Kemi Badenoch Names Andrew Griffith Shadow Chancellor in Conservative Reshuffle
UK Treasury and Markets Focus on Fiscal Headroom Ahead of Autumn Budget
UK Government Reverses Early Release Plans for Serious Violent and Sexual Offences
UK and France Review Border Cooperation After 48,000 Small-Boat Crossings Prevented
UK Growth Outlook Weakens as Inflation and Energy Costs Rise
Breeding Tropical Mosquitoes Discovered in East London
Sadiq Khan Agrees to Search of Digital Communications in Palantir Lawsuit
Scottish Protesters Call for Moratorium on AI Data Centre Expansion
Uber Drivers Bring London Class Action Over Algorithmic Management
Reform UK Accepts £4 Million Donation From Cryptocurrency Billionaire Pardoned by Trump
Justice Secretary Tightens Early Release Scheme to Exclude Manslaughter Offenders
Kemi Badenoch Reshuffles Conservative Team as Reform UK Pressure Grows
British Mortgage Rates Rise as Global Bond Sell-Off Pushes Up Borrowing Costs
UK Records Hottest Summer on Record in 2026
UK Government Urges Households to Stock Essential Supplies Ahead of Severe El Niño Risk
UK Prepares Targeted Sanctions Over Israeli Settlements in West Bank
Reform UK Faces Electoral and Police Scrutiny Over Foreign Donation Allegations
UK and France Expand Channel Migration Cooperation as Trade Tensions Surface
UK Marks Merchant Navy Day With Tribute to Civilian Seafarers
Burnham Pays Tribute to Two Police Officers Killed on Duty in Northern England
Booking.com Left Fake Downing Street Listing Online for Two Months, Which Says
Burnham and Macron to Review UK-France Cooperation on Channel Crossings
UK Business Confidence Improves Slightly but Investment Concerns Persist
Burnham Faces Pressure Over Future North Sea Oil and Gas Licences
Burnham Pushes Wider English Devolution Through ‘Number Ten North’
British Chambers of Commerce Raises 2026 UK Growth Forecast to 1%
Keir Starmer Resigns as Holborn and St Pancras MP, Triggering By-Election
UK Chancellor Faces Tighter Budget Headroom as Long-Term Borrowing Costs Rise
UK Government Weighs Thames Water Nationalisation as Financial Crisis Deepens
Prime Minister Andy Burnham Faces First Commons Questions Over Tax and Spending Plans
Eleven British Seafarers Receive Merchant Navy Medal
Which? Creates Fake 10 Downing Street Rental Listing to Expose Booking.com Vetting Weaknesses
BP Appoints New Chairman in Effort to Stabilise Leadership
Aberdeen Sells Hydrogen Bus Fleet at Heavy Loss After Green Transport Experiment
UK Records Hottest Summer on Record as Climate Change Intensifies Extreme Heat
Scotland Pledges to End Temporary Accommodation for Children and Build 111,000 Affordable Homes
DNO Agrees $396 Million Deal to Acquire Capricorn Energy
Uber and Wayve Launch UK’s First Supervised Autonomous Ride-Hailing Service in London
Britain Expected to Avoid New US Tariffs Targeting European Union
Middle East Conflict Pushes UK Energy Costs Higher and Revives Inflation Concerns
×