Britain’s growth prospects are the gloomiest of all developed nations. The OECD predicted last week that the UK economy would not grow at all next year, the worst outlook for any OECD nation. This follows warnings in April from the IMF that the UK will experience the worst growth out of the G7 nations in 2023. After a decade of stagnant wages, it seems Britons need to resign themselves to the fact that the buoyant growth of the 2000s is but a distant memory.
Every country has suffered the shock of the pandemic, followed by the spike in oil and wheat prices triggered by Russia’s illegal war in Ukraine. But other developed economies have proved more resilient, enjoying export-driven recoveries in the wake of Covid. Here in Britain, the economic malaise left exposed by the 2008 financial crisis is long term and structural.
This crisis was supposed to prompt a big economic rethink: a reckoning with Britain’s addiction to growth fuelled by rising levels of consumer debt enabled by rising house prices. The then shadow chancellor George Osborne pledged to rebalance the economy away from debt-driven growth to more productive development, driven by business investment and exports, underpinned with an expansion of the UK’s manufacturing base and a reduction in the huge regional inequalities between the south-east and the rest of the country.
No such thing materialised. Instead, the least affluent areas of the country were forced to bear the biggest burden of cuts to public services, undermining their potential to attract investment. Britain’s sluggish recovery from the financial crisis – average GDP growth in the decade after 2008 was a full percentage point lower than it was in the run-up to the year – was propelled by consumer spending and resurgent house prices. Productivity growth dropped substantially, taking Britain from second in the G7 for productivity growth pre-financial crash, to the second slowest post crash. There remains a significant finance gap for fast-growing small and medium-sized enterprises (SMEs), a market failure the government has not adequately addressed.
And Brexit has pushed the British economy in precisely the opposite direction to what was needed after the financial crisis. The hard Brexit pursued by Boris Johnson – taking Britain out of the EU’s economic and political institutions in an ill-thought-through attempt at a “clean break” – has undermined the fragile political settlement of the Good Friday agreement in Northern Ireland and deepened Britain’s economic ailment.
Investment and exports are down as a result of Brexit. Now that similar countries are starting to recover from the pandemic, the scale of the damage is becoming more evident. Last week, a piece of analysis estimated that the economy is already 5% smaller than it would have been had the UK not left the single market and customs union. These impacts are not unexpected but there was simply not the slack in the lethargic British economy to absorb them. Even media publications that supported Brexit at the time are recognising that Brexit is costing British voters day in, day out, in the form of higher business costs, particularly for exporting SMEs, lower wages, and more poorly funded public services, a cost we can ill afford.
Brexit has also affected the price of sterling; a decline in the value of the pound has increased the cost of imports even as British exports have fallen, contributing to the cost of living crisis. Economic forecasters predict the pound could drop further against the dollar and euro, particularly if UK-EU relations over the Northern Ireland protocol become even more fractious.
This hopeless government, mired in incompetence and scandal, has no answers. There is no industrial strategy, no plan to boost growth outside London and the south-east, no alternative ideas for exporters in the wake of Brexit. Ministers have no idea what to do about the UK’s dysfunctional housing market; last week, the prime minister said he would expand the right to buy for housing association tenants with an announcement so lacking in substance it would make the back of an envelope seem robust. Johnson seems determined to continue to pick fights with the EU over the Northern Ireland protocol in a way that will only prolong the economic pain and drive a further wedge between Britain and its largest export market. Rising inflation will not just force real wage cuts on many workers; it will also erode the true value of spending on public services, imposing further austerity on schools and hospitals.
The prime minister and chancellor cannot even agree on the fundamentals of what the government’s approach should be, and a joint speech they were due to give this week has been postponed. The OECD has criticised the chancellor for his fiscal policy, which, even with the multibillion-pound package of support he announced last month, is contractionary overall, just as the economy is in desperate need of a stimulus.
The Conservative MP Tobias Ellwood was right to advocate for Britain rejoining the EU’s single market a week ago. Brexit ideologues can rail against this all they want. But as Britain looks set to rediscover its role as the sick man of Europe, a closer economic relationship with the EU is starting to feel like an inevitability, no matter how long it takes.
