The Financial Times by Chris Giles
The UK economy is in the doldrums. The IMF has forecast it will be the worst-performing large advanced economy this year. But the problems stretch back much further.
Average annual growth rates have more than halved since the global financial crisis of 2007-08. The UK economy is no bigger now than it was on the eve of the coronavirus pandemic at the end of 2019 and the Bank of England does not expect to recover that ground until 2026 at the earliest.
Michael Saunders, who recently left the bank’s Monetary Policy Committee and now advises Oxford Economics, says that “in policymaking terms, we’ve been careless about potential growth”.
The lack of success in stimulating economic growth since 2007 has been especially notable. If the UK’s gross domestic product per person had grown as rapidly in the 15 years after 2007 as it did in the 27 years since 1980, every person in the UK would be £10,600 or 31 per cent a year better off in real terms versus the £33,700 of GDP per head that the UK achieved in 2022, according to IMF data.
For all these stark statistics on the UK economy’s decline, Jeremy Hunt, who will present his first spring Budget on Wednesday, has spent the first two months of the year noisily dismissing concerns. “Declinism about Britain is just wrong,” the chancellor said in his flagship economic speech in January. “It has always been wrong in the past — and it is wrong today.”
Using judiciously selected statistics, Hunt painted a picture of UK performance since 2010 being in “the middle of the pack” as he hailed the fact that “output per hour worked is higher than pre-pandemic”.
Few UK chancellors before Hunt would celebrate a marginal rise in productivity over a three-year period when 2 per cent growth every year was previously the norm. There is also a remarkable consensus across the political spectrum and among almost all economists that the UK does indeed have a growth problem. While Liz Truss’s plan to kick-start dynamism in an effort to achieve a 2.5 per cent annual growth target backfired when markets reacted to her “mini” Budget last September, the ambition has been taken up by Sir Keir Starmer, who last month pledged to make the UK the fastest-growing economy among the G7 if Labour wins the next general election.
Economists looking at the post-2007 UK economy tend to split the 15 years into three distinct periods. There was the financial crisis itself, during which a crisis in the banking system spread into a deep recession. This was followed from 2010 by the austerity period, where growth was slower than before 2007 but UK GDP growth per head was still at the top of the G7 league table. The UK’s performance then deteriorated further after the Brexit referendum in 2016 both in absolute terms and relative to other G7 nations.
Although all G7 economies were hit by Covid-19 and the Russian invasion of Ukraine, the UK is the only of these advanced economies not to have returned to its pre-pandemic level of output.
The forecasts are even worse. Catherine Mann, an external member of the BoE’s MPC, noted in a speech last month that the BoE’s outlook was much less optimistic than the US Federal Reserve and European Central Bank. The latter two expect the US and eurozone economies to be between 7 and 10 per cent larger, respectively, at the end of 2025 than they were before coronavirus struck. The BoE does not expect the UK’s economy to have grown at all in that period.
Even though the UK’s growth performance has been worse after 2016 than it was during the austerity period, economists are still arguing over the reasons for the initial decline in the growth rate during the 2010 to 2016 period.
Those close to George Osborne, then chancellor, point to the UK’s large financial system and its consequent deep exposure to a global banking crisis, a declining North Sea oil sector and a global productivity problem. This weakness of the UK’s previously strongest sectors and companies has been corroborated in multiple studies, most recently by the Centre for Cities, which also found that London’s productivity growth dropped from being almost double that of the rest of the UK to lagging behind other parts of the country.
The dispute on the causes of the growth slowdown relates to the impact of austerity on economic performance. Most economists now accept that the sharp reductions in public spending between 2010 and 2015 delayed the recovery from the financial crisis, but the crucial question for the longer term is whether the effects of austerity can still be felt today in lower living standards.
Professor Jonathan Portes, of King’s College London, is convinced that austerity “contributed to the [UK] underperformance in a way that was significant, but clearly not the whole story”. He cites cuts to public investment lowering the nation’s capital stock and contributing to weaker private investment, worse-performing public services and the absence of a “hot economy” driving dynamism and growth as the mechanisms at work.
Many other economists are sceptical about these forces — not because they deny they existed, but because they believe the scale of any impact was small. Tim Pitt, partner at Flint Global, a consultancy, and former adviser to chancellor Philip Hammond, says that the public investment cuts were shortlived and minuscule compared with the size of the existing capital stock.
“The idea that public investment overall explains the growth slowdown does not add up from a numbers perspective,” he says. “When you’re talking about £10bn here or there are you really saying that this is the difference between poor productivity and everything being OK?”
Others note that business investment actually grew strongly in the period, especially after 2012. Kitty Ussher, chief economist of the Institute of Directors and a former Labour minister at the time of the financial crisis, says the business climate and investment sentiment “got better in the summer of 2012 when there was suddenly a lack of negatives”. Employment grew faster after 2010 than before 2007.
But the disappointments that British citizens endured in the early 2010s, when compound annual growth rates were still over 2 per cent, were mild compared with what has happened since. And in the latter period, there is much less disagreement over the fundamental causes of poor economic performance.
There is no doubt that one of the most important restraints on growth has been the frequent external shocks hitting the UK economy and many other advanced economies.
Britain’s GDP fell more during the pandemic, partly because the Office for National Statistics took a harsher approach to measuring output in schools, hospitals and other parts of public services than other countries. If the services were shut they produced no output, the statistical agency judged. This was a temporary effect and the UK’s recovery as it emerged from lockdowns was also stronger than other countries for the same reason.
The UK was also heavily exposed to Russia’s invasion of Ukraine and the surge in wholesale natural gas prices, because UK households use gas more than other countries to heat their homes and for all its success at decarbonising, the nation is more reliant than most on the fuel for electricity generation.
These factors are not, however, sufficient to explain why the UK economy alone has not recovered the level of GDP from the end of 2019. For that, economists point to three uniquely British impediments to economic performance.
First is Brexit, which raised import prices, generated uncertainty for business, raised trade barriers, complicated regulatory compliance and hindered the recruitment of workers.
John Springford, deputy director for the Centre for European Reform think-tank, estimates that these effects and more had cost the UK economy 5.5 per cent of GDP by the summer of 2022. “Weak investment from 2016 is curtailing today’s output, car manufacturers are running down capital and stocks, immigration from the EU has slowed, and the retained EU law bill could mean divergence from EU rules,” he says.
The BoE has a lower estimate of 3.25 per cent, but judged in February that, “these [Brexit] effects might have occurred more quickly than previously assumed”. As Mann of the MPC tartly noted last month, “no other country chose to unilaterally impose trade barriers on its closest trading partners”.
Unlike ministers, who still pay lip service to the economic benefits of leaving the EU, Brexit-supporting economists are more willing to say there was a cost, although they emphasise the weakness of government policy since rather than the rupture with the bloc itself.
The second British problem according to Julian Jessop, a fellow at the free-market Institute of Economic Affairs, is the tendency of government policy after 2016 to “flip-flop” from one idea to the next. “It’s been a period of high uncertainty and companies have spent loads of time staying afloat rather than building their businesses,” he says. Rising levels of tax and regulations, particularly on the finance and energy sectors, have also not helped, he adds.
The third UK weakness on the charge sheet has been a rapid and unexpected deterioration in the UK’s labour market performance during the pandemic. Although companies are still able to provide more jobs to UK citizens than the European average, fewer people are now employed or looking for work than in 2019. This almost unique drop in participation in the jobs market, particularly for those over 50, is likely to persist, the BoE says, because “many of the people who have left the labour force appear unlikely to return soon”.
A toxic mix
On top of these new reasons for concern about the UK’s economic performance are longstanding issues that governments have failed to resolve over many decades. The UK’s planning and land-use system attracts much criticism for giving opponents to any development the upper hand and stopping growth. Sam Dumitriu, head of policy at Britain Remade, a new campaign to promote growth, says the UK’s problem is an “inability to get what we need built”.
“We do not build enough homes near the best jobs, but it is not just housing,” he says, citing a shortage of laboratory space in Oxford, Cambridge and London and the difficulty in building new energy facilities whether onshore or far from the coast.
Britain’s skill levels for those without university education lag behind those of other rich countries and for decades there has been a “long tail” of companies with poor productivity levels, which neither seem to improve nor go out of business. And the nation, much like the entire western world, is ageing rapidly. “Underlying [the UK’s growth problem] is also demographics”, says Saunders. “If we hadn’t had Brexit and Covid, we’d have talked more about demographics lowering growth rates over the past five years.”
The explanation for the UK economy’s growth crisis since 2007 is therefore not one single problem, but a combination of global crises and self-inflicted policy errors. There is little doubt, however, that the disappearance of large UK boom industries, global shocks, Brexit, poor governance and a deteriorating labour market have been a toxic mix.