The national economic debate is at its least illuminating when it descends into a form of sports reporting – with arguments about who’s up, who’s down, and who’s winning and losing. And thanks to a slew of economic forecasts – from the IMF and central banks in the US, Eurozone and the UK – this is exactly what we’ve had this week.
The main takeaways from these fresh forecasts is that the picture for the UK economy is especially gloomy: output is set to shrink this year (but not by as much as the Bank of England feared last autumn), and our economic performance is far weaker than the Eurozone and the US.
Stepping back from the noise of new data, the big picture is that the British economy has been under-performing for some time. In the 12 years following the financial crisis, UK productivity has grown at half the rate of that of the 25 richest OECD countries. While some question whether growth in Gross Domestic Product really makes much difference to their lives, the blunt reality is that it does.
Britain’s toxic combination of low growth and high inequality is why we’re living through a living standards disaster. Weak growth has fed directly into stagnant wages and lower levels of financial resilience, while high inequality has left the poorest brutally exposed to the cost of living crisis.
The economic challenges Britain has faced in this period aren’t unique – apart from Brexit of course. Many nations are currently grappling with high inflation, just as they were with Covid and the global financial crisis. But Britain, with a particularly gas-reliant energy system, has struggled the most, and got we have got poorer as a result.
Back in 2009, as western nations battled with the fallout from the financial crisis, the typical household in Britain was slightly (13 per cent) poorer than their counterparts in Germany, and over a third (38 per cent) poorer than the typical American household. Fast forward a decade – during which Britain stalled economic growth-wise – and those income gaps have soared. The typical German household is now 26 per cent richer, and the US is out of sight – 66 per cent richer than the typical British family.
This economic decline is real – not rhetoric, as some ministers claim – and depressing. It is also why so many families are exposed to the cost of living crisis we are in: even in 2019 the poorest fifth of households were spending almost 60 per cent of their incomes on essentials.
But behind this story of relative economic decline is a cause for optimism too. We don’t need to lead from the front if we are to secure stronger economic growth in Britain – we just need to catch up with those who we have fallen behind.
We’ve managed this before – in the heady 1990s and early 2000s, the British economy was catching up with the French, Germans and Americans. In the 1970s the US was 50 per cent more productive than the UK. By 2005 the gap had fallen to 10 per cent. We can repeat this catch-up growth again with the right economic plan – building on our strengths as a world-leading exporter of services and pharmaceuticals, and investing in our second cities to turn them into economic powerhouses and close their productivity gaps to London.
We also need to confront our weakness head on – British businesses need to invest more, and we need to address our woeful record on training and managing staff.
This isn’t an easy task – but it’s a necessary one. Just as our economic decline wasn’t inevitable, neither is an economic bounce back in the decade ahead. Just ask Italy, now into a third decade of economic stagnation, with political chaos to boot.
But the prize for achieving stronger growth is huge. Becoming as rich and as equal as countries we consider to be our peers like France, Germany, the Netherlands, Canada and Australia would boost the annual incomes of a typical family by £8,800. That’s the kind of living standards growth we haven’t seen in a generation, but it’s the least households deserve.
This article was originally published in the i paper
The UK economy has recovered from doom and recession before – and it can do so again