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Since the global financial crisis of 2007-09, the UK has had an unplanned experiment with “de-growth”. This has taken the form of an unplanned collapse in economic growth. Predictably, this deterioration has caused huge problems for managing the public finances, maintaining public services and keeping the public happy. A stagnant economy is a recipe for general discontent.
Last July, the Conservative party, which ruled the country from 2010 to 2024, duly suffered the worst loss in its history. Now the Labour party’s job is to turn the ship around. Will it succeed? The simple truth is that what it offered in the Budget last week is most unlikely to achieve this. The question, rather, is whether anything can do so.
What if anything is unusual about the UK? It is not so much the low growth itself, which is in line with that of many other high-income countries (with the big exception of the US). It is the size of the fall in the UK’s rate of economic growth per head since the financial crisis that is exceptional. Our starting point must be to analyse the roots of that and consider whether and how it might be reversed.
First, let us look at the broad facts. In his recent book, Great Britain? How We Get Our Future Back, Torsten Bell, formerly chief executive of the Resolution Foundation and now a Labour member of parliament, states that not only have real wages stagnated for 15 years, but also that this had not happened since the early 19th century. Again, in my column on the Budget, I noted that UK real GDP per head (at purchasing power parity) was forecast to be 29 per cent lower in 2024 than it would have been if its 1990-2007 trend had persisted.
The striking fact about the UK, then, is this huge deterioration in the growth rate. True, the level of GDP per head in 2024 was only a measly 7 per cent higher than in 2007. This was a worse performance than in the US (up 25 per cent), Germany (up 11 per cent), Japan (up 10 per cent) and France (up 9 per cent), though it was a bit better than in Canada (up 4 per cent) and Italy (stagnant). But the UK was roughly in the same camp as Japan and the other large European high-income countries. Yet the deterioration in its trend growth rate of GDP per head between 1990-2007 and 2007-24 was 1.9 percentage points (from 2.5 per cent to 0.6 per cent). All G7 members suffered a decline in their growth of GDP per head after the financial crisis, but the UK’s was the largest of them all. (See charts.)
So, what explains this collapse in the UK’s growth of GDP? One plausible culprit is the country’s low investment rate. But the UK’s average gross investment between 2008 and 2024 was only 1.4 percentage points lower than between 1990 and 2007, at 17.3 per cent of GDP. Even though this was also the lowest rate in the G7, the fall does not seem big enough to explain the growth collapse.
One explanation is that the averages are distorted by the Great Recession and the pandemic. Another is that the modest fall in gross investment was associated with a far larger proportional fall in net investment. The Conference Board’s analysis is consistent with this: its decomposition of contributions to growth attributes 1.1 percentage points of the fall in average growth to that in the contribution of capital services and 0.5 percentage points to the fall in the contribution of “total factor productivity”.
A possible conclusion is that lower investment, rising depreciation and declining efficiency have combined to lower growth sharply. But behind this, especially the last, must surely lie something else: pre-crisis GDP and GDP growth were either exaggerated, or unsustainable, or both. The decline of the oil sector is one cause of the unsustainability. Another is that the pre-2008 global financial bubble, from which the UK, home to a leading financial hub, benefited, also distorted GDP. It not only exaggerated the sustainable size of the financial sector, but also exaggerated the sustainable size of a whole host of ancillary activities.
Today, the post-crisis slump in growth looks more like the reality and the pre-crisis boom, in large part, a delusion. This view might be too pessimistic, in that the shocks have been so damaging. If the environment becomes more stable, animal spirits might return. Yet a medium-sized trading country with an ageing population, a mediocre position in the world’s most dynamic sectors, self-inflicted barriers to trade with its biggest trading partner, huge pressures for higher public spending, low investment and even lower saving rates, confronts many obstacles to faster economic growth. Today’s combination of higher interest rates with ratios of public sector net debt to GDP already close to 100 per cent is also uncomfortable. So, too, is the deeply unsettled global political environment.
The Office for Budget Responsibility itself is rather optimistic. In its report last week, it assumed a recovery in productivity growth to roughly halfway between its pre- and post-financial crisis averages. But it would be foolish to assume that even this is going to happen all by itself. What the country needs is a strategy for growth that takes on its most obvious weaknesses: low investment, desperately low savings, insufficient mobilisation of capital for innovative businesses, poor infrastructure, inadequate housing, a long tail of weak companies, inadequate creation of skills, and huge and persistent regional inequalities. We must regret the sad failure to ensure that the North Sea oil windfalls and the ultra-low interest real rates of the post-financial crisis period left a longer-term legacy.
All this is the result of the UK’s habitual “muddling through”. Given recent disappointments, something more determined is needed. It is not yet here.
