Recent news about the UK economy has been a series of staggering highs and lows. The highs have often featured UK companies. Profits have reached record levels, as in turn have the indices that track the value of those companies’ shares, providing a bonanza for executives and shareholders alike.
The lows have featured British households. The cost of living crisis reflects the combination of higher prices for essentials with household incomes that are at best standing still. The Resolution Foundation reported in late 2022 that British workers were living through a two-decade wage stagnation.
This disjuncture is certainly morally jarring. But it is also intellectually jarring. At one level, the two developments are clearly connected. Part of the reason that UK companies are generating record profits is precisely because they are successfully keeping wage costs down. The wage inflation feared by central banks is nowhere to be seen, least of all in the UK.
Yet it has long been understood that across an economy at large, companies cannot simply drive down wages and expect profits to hold up in the medium or long term. After all, workers are also consumers. Lower wages mean a lower capacity to consume.
To be sure, the credit system can help to support consumption in the face of wage stagnation; but not ad infinitum. Ultimately, wage stagnation will curb demand. This insight is at the heart of Keynesian economics and it underpinned policymaking between the 1950s and 1970s in large parts of the world, the UK included.
On the face of things, this would seem to suggest that the disjuncture that currently characterises the UK economy cannot last. The inevitability of constrained demand surely makes the concurrence of depressed wages and buoyant profits unsustainable, does it not?
Alas, no. British people having less money in their pockets is in fact not at all incompatible with continuing robust profits for the largest UK-based firms.
To understand why, we need to appreciate the idiosyncratic nature of the UK economy. Let us look at who its leading firms – those in the headlines for their record profits – are, what they do and where they do it.
Much more than is the case in other countries, such firms tend to be distinguished by one of two key features, both of which insulate the companies in question from the potentially negative impact of UK wage stagnation.
The first is their geography. Companies in the FTSE 100 index derive less than a quarter of their revenues from the UK – a remarkably small share. In other words, domestic demand conditions are largely irrelevant to their fortunes.
That this is true of the UK’s big oil and gas companies, BP and Shell, whose profits are at all-time highs, is well known. But it is no less true of profit heavyweights in other sectors such as AstraZeneca, BAE Systems, British American Tobacco (BAT) and Unilever.
The second key feature of many leading UK firms is less often discussed. This is the non-discretionary nature of the expenditure that households incur in consuming their services: expenditure such as loan payments, housing rent and utility bills.
Many of these companies have been in the news for their profits, too – companies such as HSBC, Centrica, Thames Water and Annington Homes. Their household customers, many (and, in some cases, all) of whom are located in the UK, are essentially captive: they must make payments, whether wages are rising or not.
Certainly, for numerous such customers, stagnant wages make these payments hard to afford. But in the cases of utilities and rent, the government widely steps in to support payment, providing a form of insurance not just for the household, but also for the service provider and its financial bottom line.
The UK government now spends about £23bn a year on housing benefit, with perhaps as much as half going to for-profit private landlords – a share that has been growing fast. Meanwhile, since the start of the energy crisis in autumn 2021, UK energy subsidies have climbed to nearly £100bn.
Why the contemporary UK economy has these two pivotal idiosyncratic features is an important question. In the case of the disproportionate international focus of its leading firms, there are various contributory factors, but the most important by far is the UK’s imperial past. Anglo American, Barclays, BAT, BP, HSBC, Imperial Brands, Rio Tinto, Unilever … the list goes on. In significant measure, the history of the commanding heights of the FTSE 100 is the history of empire.
In the case of the disproportionate prominence of firms earning revenue in the form of non-discretionary household expenditure, the explanation is more singular and recent: privatisation. In the 1980s and 1990s, both Conservative and New Labour administrations went about privatising publicly owned assets that occasioned regular household payments – principally housing and utilities – with a gusto and comprehensiveness unparalleled elsewhere in the global north.
And so the UK is today in a bizarre and baleful situation where domestic economic stagnation, and especially wage stagnation, is in large part immaterial to the profitability of its largest companies. Even as such companies cut wages, their profits can rise regardless because there is little resulting constraint on effective demand for those companies’ products and services.
Needless to say, it is not a pretty picture. Neither is it one availing of obvious political solutions. These are structural features of the economy, not mere epiphenomena.
For all the talk of deglobalisation, the international tentacles of the UK’s leading multinationals have not been shackled one jot. And for all the periodic political gestures toward renationalisation – Annington Homes being the latest under putative threat – not one meaningful such expropriation has yet occurred.
It would take a political administration of rare vision and boldness to turn around and set on a new course the tanker that is the UK economy. Sadly, no such administration appears imminent.
Brett Christophers is a professor in the department of social and economic geography at Sweden’s Uppsala University
