How might the UK escape its economic ‘doom loop’?
The UK economy has recently been characterised as being stuck in a doom loop – a reference to poor economic performance since the 2008 financial crisis.
The US has seen much stronger economic performance, but the UK’s experience is not dissimilar to that of several advanced European economies. That being said, there are distinctive features of the UK’s economic travails. In particular, a key cause of the UK’s doom loop is the marked decline in productivity growth since the financial crisis. This had been running at around 2% in the run up to the crash but is now closer to 0.3%. This has negatively impacted GDP growth per capita, leading to poor UK performance in real wage growth and living standards, especially for middle- and low-income households.
The causes of this poor productivity performance are keenly debated. One key factor is investment, which was been particularly negatively impacted by the regulatory and policy uncertainty associated with when and on what terms the UK would leave the EU following the 2016 Brexit referendum. Estimates suggest that the fall in investment may be as high as 10% following Brexit.
The UK’s economy is also marked by profound regional inequality with some of the biggest variations in productivity within the OECD. Again, the causes are hotly debated but there is a growing consensus that a significant part of the explanation lies in the underperformance of large cities beyond London, particularly compared to their European counterparts.
What might the UK do to escape this doom loop?
Three areas stand out as being particularly important.
First, there are several strengths within the UK economy that could be better harnessed to improve economic growth and productivity. Most notably, the UK has a skilled and flexible labour force which will be increasingly important given the dominance of services in future economic growth globally. PISA data points to marked improvements in school performance, and the significant expansion in higher education in the last 30 years means that the UK participation rate in tertiary education is above the OECD average. Ensuring that there are suitable skilled jobs for these individuals, within but also beyond London and the South-East, will be critical in delivering improved productivity at the national as well as at the regional and city level.
Second, the UK’s economic strengths in the last 30 years have been concentrated in the service sector, and particularly in financial services. Research shows that these sectors have outperformed manufacturing in recent years. In particular, following Brexit, UK services trade has been more resilient than that in manufacturing. This growth is being driven by a wide range of services with significant growth in professional and business services recently. There are clear opportunities for the UK to continue to leverage its strengths in these areas as well as in new services activity, particularly high productivity services such as those in technology and AI.
Third, the UK also shares with other economies the potential to derive economic growth from the development of green industries as part of net zero and wider energy transition commitments. The UK has already delivered a strong track record in this area, leading in decarbonisation in several specific areas, notably in the development of offshore wind.
However, in order to maximise the opportunities in these areas, the UK will need to carefully calibrate its approach alongside those of its international competitors (notably the US Inflation Reduction Act and the EU’s New Zero Industry Act and Critical Raw Material Act). The UK does not have the same domestic financial investment potential of these larger markets, so in order to succeed, it will need to deliver on its ability to better tailor and more rapidly adapt regulation as a smaller jurisdiction.
This points to a wider issue that the UK will have to come to terms with if it is to successfully deliver its potential for economic growth. The UK is adjusting to a new position in the global economy, outside the EU’s single market, at the same time as the global economy itself is changing profoundly. This is seen in growing protectionism and concerns regarding how changing geo-politics will shape the future of globalisation. Having a clear economic strategy and stable policy framework to deliver it, based around the strengths and opportunities for the UK economy, whilst also being realistic about weaknesses, will be essential to deliver much needed economic growth.
About the author
Sarah Hall is 1931 Professor of Geography and a Fellow of St John’s College, University of Cambridge. She is a public economic geographer whose work focuses on the uneven impacts of profound economic change including Brexit, the changing economic position of China internationally, and the rise of finance led capitalism. Sarah regularly uses her research findings to contribute to academic, public and policy debate. Sarah is also Deputy Director of UK in a Changing Europe.
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