Listening to Bank of England officials in recent days, the message is clear: Britain’s economy is in a dire state.
Bombed out by the 2008 banking crash and stunned by the Brexit vote before being poleaxed by Covid-19 and then a war in Ukraine, every industry is suffering, and to a considerable extent. Business tries to drag the economy out of the morass only to find the bog is so deep there is no traction.
We can expect to see headlines over the coming months signalling a revival of sorts. That should be expected when energy costs to consumers and factory owners are becoming less onerous after steep falls in gas and petrol prices. Yet the decades of stumbling from one false dawn to another look as if they will continue for another 10 years.
Threadneedle Street’s finest say in their most recent forecasts that by 2026 the UK economy will have just about reached its previous peak, hit in 2019. That is seven lost years of growth.
Traditional measures of growth are not everything, as anyone concerned about the warming planet will know. Every form of economic activity is shoved into the GDP blender to construct a single growth figure, whether the nature of its output destroys the planet or lowers carbon emissions.
However, we have understood for some time that investment is needed to convert the economy to green tech, to insulate homes and improve the nation’s denuded biodiversity. So seven years of lost growth is important when there was the potential for it to help combat the climate crisis. There is such a thing as good growth.
Conservative politicians will be praying that something turns up to put rocket boosters on the economy, propelling them through to the next election and victory. They need something to turn up, because for most of them planning and strategy have proved too taxing, or too boring, to be included in the diary.
They benefited from North Sea oil in the early 1980s, the privatisation of state assets in the late 1980s, the sale of mutually owned assets in the 1990s (building societies and mutual insurers) and excessive bank lending in the noughties.
Since 2010, the revivalist hope has come not from mainstream Conservatism, but its right flank, which promised a Brexit bonanza. The road out of Brussels has proved more difficult to navigate than they expected and the latest GDP figures show that trade, far from being a positive benefit to the nation, is a drag and will continue to be for some time.
Business investment has sagged and large numbers of the workforce have decided they have had enough of the nine-to-five and either retired or returned to their homelands.
In the absence of more trade and higher business investment, the consumer has proved to be the main prop for the economy since 2010. Through the “good years” before the pandemic in 2018 and 2019, the Office for Budget Responsibility estimated that 80% of GDP growth could be accounted for by household consumption, and that much of this resulted from people running down their savings.
The government hopes people who accumulated a fresh stash of savings during the pandemic will release that cash again, cushioning the blow from government austerity and higher interest rates courtesy of the Bank of England.
This is the rescue plan, if such a notion can be called a plan.
At the moment the signs are not good, and anxiety about the future means many families are keeping a lock on their deposit accounts. The sums they hold amount to about £200bn, and the chancellor, Jeremy Hunt, could really do with some of it being spent soon – though in a measured and steady fashion, to make sure the central bank does not get spooked and raise interest rates again.
This leaves the economy stuck in a rut, trapped by the flight of people and investment cash after the Brexit vote into having to operate at a significantly lower level.
It is the lack of capacity to generate goods and services following this exodus that exercises the Bank of England. Former Bank official Adam Posen, who now heads the Peterson Institute thinktank in Washington, puts all of the UK’s short-term problems down to Brexit. Without it, the workers and the investment funds would be flowing, which would allow the economy to expand without pushing up inflation. This would allow the Bank to keep interest rates low and the economy humming.
Yet, as Posen and so many others also say, the UK’s economic chains stretch back further than Brexit. The UK’s weak industrial base is a victim of the stop-start politics that denies planners and strategists the opportunity to take the long view. If something doesn’t turn up, it is likely to cost the government money – from an epidemic of health and social care problems, for instance – rather than bail it out. That’s a warning to Labour’s shadow chancellor, Rachel Reeves, as much as it is to Hunt.
