The long and the short of achieving stronger growth

It is easy to forget, amid the many distractions of recent weeks, that when the new government was elected a few months ago, it put growth at the top of its economic agenda. Since then, that message, and the ambitious target of putting the UK at the top of the G7 growth league — something that the Tories were claiming to have achieved in the early months of this year — has been rather muted.
Growth is important, indeed essential. Many people see the need for growth as purely tied up with the public finances, with a stronger economy offering the easiest way to make black holes disappear by generating a faster rise in tax revenues.
It goes much deeper than that. Growth is the key to prosperity, and the slow growth of recent years is reflected in a limited rise in living standards. The economic shocks of the past decade and a half, some self-inflicted, have taken their toll. Gross domestic product (GDP) per head, in real terms, is up by a tiny 5.2 per cent in total since the pre-financial crisis days of early 2008, compared with a rise of more than 45 per cent over the previous 16 years. Prosperity has stalled.
A few days ago, Britain’s official statisticians released new figures for economic growth, and they were a touch disappointing. Not only did they include a small downward revision to growth in the second quarter of this year, from 0.6 to 0.5 per cent, but they also failed to change the big picture.
Significant data revisions left the UK near the bottom of the G7 growth league compared with pre-pandemic, pre-Brexit levels. Thus, while growth in 2022 and 2023 was revised up a little, cumulative UK growth since the final quarter of 2019, before Covid hit, was just 2.9 per cent — against 9.4 per cent for America, 5.5 per cent Canada, 4.7 per cent Italy, 3.7 per cent France and 3 per cent for Japan.
Only struggling Germany, with 0.2 per cent cumulative growth, saved the UK from getting the G7 wooden spoon. There is a separate piece to be written about Germany’s struggles, and whether it can manufacture its way out of trouble this time, which I shall do soon.
For now, though, I want to focus on the UK economy’s disappointing performance, and there are two aspects to it. The first, amid evidence of a slowdown in growth after a reasonably good first half of the year, is whether it can be lifted again in the short term.
The second is whether it is possible to address the UK’s long-term growth weakness, a topic on which we hope to engage expert voices in coming weeks.
Those disappointing growth figures showed that while GDP per head rose by 0.2 per cent in the second quarter, it was still down by 0.2 per cent on a year earlier and was lower than at the end of 2019.
There were, however, the seeds of a short-term boost to growth in the latest figures. Consumer spending, which can normally be relied upon to drive growth in the UK, has been unusually weak. It rose by a mere 0.2 per cent in the latest quarter and, like GDP per head, is lower, adjusted for inflation, that it was before the pandemic.
It is easy to understand why. Households were rocked by the pandemic and then by the cost of living crisis as inflation soared to 11 per cent. Higher interest rates have hit those with mortgages. People have been squeezed and, when they could, saved more than usual.
That squeeze, however, is now starting to ease. Inflation is within a whisker of the 2 per cent official target and interest rates, including mortgage rates, are edging lower, with much further to fall. Some of the high savings built up during the pandemic, and since, may be waiting to be spent. The saving ratio — savings as a proportion of disposable income — was a relatively high 10 per cent in the second quarter, up from 8.9 per cent in the first, as households held off from spending.
Meanwhile, incomes have started to increase quite strongly. Real household disposable incomes rose by 1.3 per cent in the latest quarter, after a 1.6 per cent increase in the first three months of the year. Incomes are outstripping prices, and while this is taking time to feed through to stronger spending, it should do so once the uncertainty of this month’s budget is out of the way.
A bit of consumer-led growth is fine, after a period in which spending has been unusually weak. It is one reason why the economy should be set for somewhat stronger growth over the next year or so.
That will not, though, solve the UK’s longstanding growth problem. This is where something different needs to happen.
Economists have clear ideas about what needs to be done. The UK needs more business investment — a rise in the UK’s investment level from 10 per cent of GDP to the 14 per cent average of competitor countries. Improved and more efficiently delivered infrastructure is another priority, which other countries do better than us, and enhanced skill levels and a better innovation record are also essential ingredients.
What these things have in common is that they were identified many years ago. Changing and improving them, though, also takes many years. There are no quick fixes to the UK’s shortcomings and the need for stronger productivity growth.
Also true, however, is that many of these shortcomings were in place when UK growth was not such an issue. We have always had a problem with low investment, poor infrastructure, inadequate skills and being better at inventing than making a commercial success of these innovations. Maybe only now are those chickens coming home to roost. Some would say that the additional ingredient now is Brexit, but slow growth was established before 2016; Brexit may have embedded it, but the problem predated it.
If we look back over previous decades, there have always been additional factors driving growth. In the 1950s and 1960s, it was the post-war reopening of the global economy and trade liberalisation. In the 1970s and 1980s, despite a lot of economic turbulence, North Sea oil made a huge difference and there was the X factor of a revival of entrepreneurialism under Margaret Thatcher. The 1990s and 2000s benefited from low inflation, particularly when it was embodied in the remit of an independent Bank of England.
In the past decade and a half, by contrast, plenty of things have weighed on growth but very little has emerged to put the economy on a stronger path. An absence of shocks would help, but that is outside our control. Closer economic relations with the EU might help at the margin, too.
Labour’s hope is that stable government will make a big difference, though its time in office so far has been characterised by unexpected turbulence. Some see technology riding to the rescue, though Diane Coyle, writing in this slot a couple of weeks ago, was sceptical about the productivity-transforming effects of artificial intelligence for the UK.
If all this suggests that getting back to stronger, sustained growth is a huge challenge, that sadly is the right conclusion to draw. Once you have lost it, getting it back is hard. We hope to come up with some answers.
PS
For various reasons, the Port Talbot steelworks and the giant cooling towers at the Ratcliffe-on-Soar power station in Nottinghamshire have featured quite a lot in my life and my journeys. Now, amid the end of traditional steelmaking at Port Talbot, with the shutting down of its blast furnace, and the closure of the UK’s last coal-fired power station, they have lost their purpose. Neither would win any beauty contests or environmental awards, but there was a solidity and, it once seemed, a permanence about them.
There is still a scaled-down future for steelmaking at Port Talbot and a campaign is under way to prevent the demolition of the cooling towers at Ratcliffe-on-Soar — a monument to what is now a bygone age. The playwright James Graham is involved, though demolition is scheduled in a few years’ time.
Some things can be repurposed, and Battersea Power Station is a spectacularly successful example. Others don’t survive even as industrial archaeology.
For many years, you knew you had arrived in the north when you passed the Tinsley cooling towers next to the M1 in Sheffield. They were demolished in 2008, having also served their purpose. There isn’t a lot of room for sentimentality in these things.
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