An ongoing “explosion” threatens Britain’s desired growth opportunities

Martin Maddy
Since the global financial crisis of 2007-2009, the United Kingdom has experienced a period of unexpected economic stagnation, which led to a sharp decline in growth rates. the country in managing public finances.

Providing basic services and keeping citizens satisfied It was natural for the economic stagnation to lead to a state of public discontent, which was clearly demonstrated in the historic defeat suffered by the Conservative Party last July after ruling the country for fourteen years.

Today, it is up to the Labor Party to find appropriate solutions to get out of this impasse. But will his efforts be successful? The truth is that what was proposed in the recent budget is not very suitable to achieve this goal. Here the urgent question arises: Is there really a plan capable of getting Britain out of this dark tunnel?

But what, if anything, is special about the UK situation? In fact, there is little difference in the low growth rate itself, which is in line with many other high-income countries (except the United States).

But what is surprising is the extent of the decline in the UK’s per capita economic growth rate since the financial crisis. We must begin by analyzing its roots and looking at possible ways to reverse this trend.

First, let’s look at the general facts. Torsten Bell, former chief executive of the Resolution Foundation and current Labor MP, wrote in his recent book Great Britain?

How to reclaim our future” noting that not only has real wages remained unchanged over the past 15 years, but that this has not happened since the early 19th century.

I also mentioned in a previous Budget article that UK real GDP per capita (at purchasing power parity) is expected to be 29% lower in 2024 than expected if the 1990-2007 growth trend continued.

So, what is surprising about the UK is this huge drop in growth rate. GDP per capita in 2024 is only 7% higher than in 2007, which is the worst performer compared to the United States (25% increase), Germany (11% increase), Japan (10% increase %), and France (9% increase).

Although the United Kingdom was roughly in the same category as Japan and other large European high-income countries, the growth rate of GDP per capita between 1990-2007 and 2007-2024 fell by 1.9 percentage points (from 2.5% to 0.6%). .

All G7 countries saw a decline in GDP per capita growth after the financial crisis, but the decline in the United Kingdom was steepest.

So what explains the sharp fall in UK GDP growth? One possible factor is the low level of investment in the country. But average total investment in the UK between 2008 and 2024 was only 1.4 percentage points lower than between 1990 and 2007.

It reached 17.3% of the gross domestic product. Although this was the lowest level in the G7 G7, the decline does not seem to be enough to explain the drop in growth.

One reason may be that the averages have been squeezed by the recession and the coronavirus pandemic. Another reason is that the small decline in total investment was accompanied by a much larger decline in net investment.

The Conference Board’s analysis agrees with this: an analysis of contributions to growth attributes 1.1 percentage points of the decline in average growth to a lower contribution of capital services, and 0.5 percentage points to a lower contribution of “total factor productivity.”

One possible conclusion is that low investment, high consumption, and low efficiency have combined to reduce growth significantly. But there has to be something else behind it, especially when it comes to efficiency:

Pre-crisis GDP and its growth rates were either too high or unsustainable, or both. The decline in the oil sector is one of the reasons for its instability. Another reason is the global financial bubble before 2008, from which the UK benefited as a major financial centre.

But it destroyed the GDP. It enhances not only the stability levels of the financial sector, but also the stability levels of a whole range of supporting activities.

At the moment, it seems closer to the truth that the decline in growth after the crisis; The boom that preceded the crisis seems largely a lie. Perhaps this view is too pessimistic, as the shocks were so damaging, but if the situation holds, movement and vigor could return to the economy.

However, a medium-sized country like the United Kingdom, with an aging population, a central position in the world’s most dynamic regions, self-imposed trade barriers with its largest trading partner, significant pressures to increase public spending, decrease investment, and even a declining savings rate, against… Many obstacles to accelerating economic growth.

The current combination of high interest rates and public sector net debt to GDP ratios approaching 100% is cause for concern, as well as the turbulent global political situation.

For its part, Britain’s Office for Budget Responsibility expressed cautious optimism In its latest report, it expected productivity growth to recover, assuming it would return to the average level before and after the crisis . But it is naive to think that this will happen automatically.

What the country needs is a comprehensive growth strategy that addresses its main weaknesses: low investment and savings, lack of directing capital to innovative projects, as well as weak infrastructure, lack of housing appropriateness, the spread of struggling firms, the problem of skills shortages, and the persistence of regional differences.

Overall, it is unfortunate that the opportunity to benefit in the long term from the oil wind from the North Sea and lower interest rates after the financial crisis. This is all due to the UK’s tendency to “flip flop”. So, after all these problems, taking decisive action has become an urgent need that has not yet been met.