People in the United Kingdom are feeling the effects of the faltering economy in their wallets as wages are unable to keep pace with growing prices.
The UK economy will contract in 2023, according to the International Monetary Fund (IMF), whereas every other major economy, including the ones in the Eurozone, will rise. The Bank of England predicts that the UK will experience a recession in 2023, albeit one that is milder and shorter than anticipated.
Given the effects of COVID-19, the Ukraine war, and the rising prices of key necessities like food and energy, the overall scenario looks gloomy. However, one has to question why the former colonial superpower is doing worse than its wealthy peers.
A bit of history
Living and income standards in the United Kingdom have drastically slipped behind those in Western Europe. In fact, by certain metrics, real earnings in the country are currently lower than they were 15 years ago, and they most likely will be much lower in 2024 as well.
This catastrophe had been coming for years. Britain’s economy expanded less quickly than that of a large portion of continental Europe after World War II. By the 1970s, there was a national discussion on how the once-great British Empire had turned into a largely passive and isolated economy.
As a response, markets were deregulated, unions were crushed, and the financial sector rose to prominence as a crown jewel of the British economy in the 1980s under Prime Minister Margaret Thatcher. Although Thatcher’s introduction of neoliberalism had several intricate side effects, the British economy surged ahead from the 1990s into the 2000s, with London’s financial boom setting the pace. Britain, which became wealthy in the 19th century as the world’s factory, had evolved into the world’s banker by the 21st.
The 2008 global financial crisis struck hard, severing Britain’s economic growth engine. The government implemented an austerity programme out of concern for escalating deficits rather than for productivity or overall demand. The outcomes were terrible.
For six years in a row, real earnings decreased. Conservative politicians searched for a villain to lay the blame on for this disaster-in-waiting after experiencing what the writer Fintan O’Toole referred to as “the dull anxiety of declining living standards.”
They presented a menu of dreadful outsiders to fearful people, including Brussels bureaucrats, immigrants, and asylum seekers—anyone but the real decision-makers who had crippled British competitiveness. A group of middle-aged, elderly people who were sentimental desired Brexit, and they got it.
The British economy has chosen finance over industry during the past 30 years, austerity over investment, while the British people opted for a closed, poorer economy over an open, richer one. Falling wages and startlingly slow productivity growth are the predictable outcomes. The truth is more in line with the reverse, despite the concern in the British media about robots taking over the world’s jobs.
The economist commentator Duncan Weldon stated, “Between 2003 and 2018, the number of automatic-roller car washes (that is, robots washing your car) declined by 50% while the number of hand car washes (that is, men with buckets) increased by 50%. It’s more like people are stealing jobs from robots.”
That might seem like a strange oversimplification because men washing cars with soap is not what the British economy is about. But it serves as a good illustration. The United Kingdom has less technological automation in its manufacturing sector than almost any other comparable wealthy nation, according to the International Federation of Robotics.
Its average robot density in 2020 was lower than that of Slovenia and Slovakia, at just 100 installed robots per 10,000 manufacturing workers. Outside of London and finance, nearly every British sector has poorer productivity than its Western European counterparts, according to one examination of the infamous “productivity puzzle” in the United Kingdom.
The United Kingdom was the first country to industrialise and the first to deindustrialise. The productivity revolution that altered the world began in Britain, yet today the country has some of the poorest productivity figures of any major economy.
The once-dominant globalised empire has opted to expressly restrict access to trade and skills on a global scale. Since Brexit, there has been a fall in immigration, exports, and foreign investment, which will likely result in a long-term reduction of the British economy’s size by 7%.
It’s possible that Americans who have travelled to the UK won’t recognise this rather dull picture of the place. That is most likely a result of their familiarity with London rather than the entire nation. The financial strength of London has obscured the broader economy’s shortcomings in innovation and manufacturing, according to economist Noah Smith.
Or, in the words of economist Matt Klein, “Take out Greater London—the prosperity of which depends to an uncomfortable degree on a willingness to provide services to oligarchs from the Middle East and the former Soviet Union—and the UK is one of the poorest countries in Western Europe.”
Right-wing opposition to openness and left-wing opposition to growth have imprisoned Britain in the present. A growing movement known as degrowtherism, which contends that wealthy nations must give up their pursuit of growth to save the world, has recently gained traction on the academic left in the UK.
On the right, elderly people who worry more about cultural wars than competition make up the majority of the electorate. The majority of persons of voting age did not support Boris Johnson and the Conservative Party in 2019, when they secured a sizable majority in the House of Commons, according to Weldon.
“I believe that was the first time that had ever occurred. You have this older, post-economic, economically insulated voting cohort that could practically afford to be anti-growth because they don’t care about the outcomes of the economy,” he stated further.
Other nations grappling with the dark trifecta of deindustrialisation, degrowth, and denigration of foreigners can learn from the United Kingdom. Its economy wasn’t robust since it offshored industries in favour of finance.
The populace was in desperate need of an enemy to blame for the ensuing decline in living standards. Conservatives looking for scapegoats found them abroad. Brexit prevented the economy from expanding further and created the conditions for a never-ending political circus.
The challenges in the US are distinct from those in the UK. However, policymakers must also deal with a structurally declining manufacturing sector, a political left that frequently doubts the benefits of economic expansion and a political right that is mostly centred on anti-immigrant sentiment.
The results of industrialisation, productivity, and globalisation might be criticised by opponents of development. But the UK demonstrates what might occur when a wealthy nation appears to reject all three. Instead of becoming some sort of positive post-economic Eden, it turns harsh, chaotic, and illogical.
Why is the UK falling behind now?
Predictions invariably fall short because there are so many variables – from weather to geopolitics – that influence economic growth. They can, however, provide a direction.
And the available data indicates that other nations have been affected by the enormous challenges of recent years less severely than the UK has.
According to data from the Organisation for Economic Cooperation and Development (OECD), which assesses the performance of wealthy nations, the UK economy contracted more than any other during the first few months of the pandemic.
Once the economy started to recover, the UK recovered quickly, but not quickly enough to make up for lost time.
However, the gap between the UK and other countries might not be as wide as it seems.
That’s because most nations gauge the effectiveness of their public services, like health and education, primarily on their expenditures, like the salary of a nurse, for instance. In the UK, they are accounted for differently by assigning a value to the services rendered, such as hospital operations.
As a result, the UK’s statistics more accurately represent the effects of strike-related disruption, closed schools, and cancelled activities during COVID-19.
The wider picture, though, is still present: the UK economy is predicted to contract, while other G7 nations are predicted to increase.
Some observers, such as pro-Brexit economist Julian Jessop, think that the IMF was unduly pessimistic about the UK’s chances and that the disparities in question—a few percentage points here and there—are not significant.
However, he asserts that there is unquestionably “something to explain” regarding the UK’s deteriorating economic performance.
Is Brexit solely to blame?
The cost of Brexit is uncertain, but according to a Bloomberg estimate, the UK economy is losing nearly £100 billion a year and is 4% smaller than it may have been if the UK had stayed in the EU.
Carl Emmerson, deputy head of the independent think tank Institute for Fiscal Studies, states, “The EU is a very rich region of the world. And we’ve made trading with that group of nations much more challenging, for better or worse, so it will undoubtedly make it more difficult for the UK economy to expand.”
He claims that another “drag on growth” after the referendum decision in 2016 is the stagnation of business investment. According to a Bank of England policymaker, Brexit cost the UK’s investments £29 billion.
The ability of EU workers to freely enter the UK to work has been restricted, making it difficult for the hospitality, agricultural, and care sectors to fill open positions.
Jessop calls himself a “Brexit optimist” and works as a fellow at the Institute of Economic Affairs, a think group that supports free markets. Although he acknowledges that there have been immediate economic consequences, he thinks that leaving the EU has significant potential benefits.
The disadvantages are still predominant because we are still in a transitional moment, he claims.
However, he asserts that these drawbacks are “smaller than people have been arguing” and “more likely to be temporary,” as many of them relate to uncertainty and the adjustment process.
What additional factors are at play?
Energy prices
The impact of Russia’s invasion of Ukraine differs amongst nations, but oil prices worldwide shot up as a result.
According to Mr. Emmerson, some European nations have more diverse energy sources than the US, which has internal reserves of fossil fuels. France, for instance, has a sizable nuclear infrastructure, and Norway has a sizable hydroelectric resource.
“Britain is pretty exposed,” he declares.
Additionally, the cost of gas, the priciest method of producing power, is the basis for how energy is priced in the UK. According to Mr. Jessop, this led to price increases throughout the economy and a worsening of inflation.
Personnel shortages
The COVID period saw the workforce shrinking in the majority of economies. However, the UK remains an anomaly, with statistics failing to recover following the crisis.
Researchers are still attempting to determine why. The lack of EU labour does not appear to be the only factor.
Young individuals are choosing to pursue education over employment, elderly people are taking early retirement, and more people are claiming long-term sickness benefits.
There are indications that the labour force is beginning to expand once more, which could later this year support growth and tax collections.
Prolonged issues
The UK’s poorer performance has other, more fundamental causes, says Diane Coyle, a Cambridge University economist. Although the economy has slowed since the 2008 financial crisis, she contends that the causes of the issues are far older, with investment falling since the 1990s.
This left the economy unable to withstand the triple shocks of COVID-19, Brexit, and the Ukraine war.
“That’s down to the long-term weaknesses, long-term underinvestment, in the private and public sector, [and] degradation of public services and infrastructure, which are just essential if the economy is going to grow,” she claims.
The UK economy, according to the Rishi Sunak government, is robust.
Chancellor Jeremy Hunt said the results indicated “underlying resilience” but added that the economy was “not out of the woods” in response to data showing that the UK narrowly escaped a recession in 2022.
The UK economy is facing significant challenges while dealing with the predictions of a coming recession. While Brexit has certainly had an impact, it is not solely to blame for the country’s woes. Issues with energy prices, personnel shortages, and prolonged underinvestment have all contributed to the current state of affairs.
However, it’s not all bad news – the UK has shown underlying resilience and there are signs that the labour force is beginning to expand once more. With the right policies and investments, there is hope for a brighter economic future in the UK.