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Following the global financial crisis of 2007-09, the UK experienced an unexpected period of “de-growth”, marked by a significant decline in economic growth. This decline has led to challenges in managing public finances, sustaining public services, and ensuring public satisfaction. A stagnant economy typically breeds discontent among the populace.
In July, the Conservative party, in power from 2010 to 2024, faced its worst electoral defeat in history. Now, it falls on the Labour party to navigate the country through these turbulent times. However, the solutions presented in the recent Budget are unlikely to be sufficient. The real question is whether any measures can effectively reverse the current trajectory.
What sets the UK apart from other high-income countries is not the low growth rate itself, which aligns with global trends (excluding the US). Rather, it is the substantial decrease in the UK’s economic growth per capita since the financial crisis that stands out. It is imperative to delve into the root causes of this decline and explore potential strategies for recovery.
One key aspect to consider is the country’s stagnant real wages over the past 15 years, a phenomenon not witnessed since the early 19th century. Additionally, projections indicate that UK real GDP per capita is expected to be 29% lower in 2024 compared to if the pre-crisis growth trend had continued.
The notable feature of the UK’s economic landscape is the significant drop in the growth rate. While GDP per capita in 2024 was only marginally higher than in 2007, the UK’s trend growth rate plummeted by 1.9 percentage points. This decline was the most pronounced among G7 nations, signaling a unique challenge for the country.
The sharp decline in GDP growth can be attributed to various factors, with low investment rates being a possible culprit. Despite the UK’s investment rate being the lowest among G7 countries, the decrease post-2008 does not seem substantial enough to account for the growth slump.
An analysis by the Conference Board suggests that the decline in growth can be partially attributed to decreases in capital services and total factor productivity. Lower investment, coupled with rising depreciation and diminishing efficiency, have collectively contributed to the stark drop in economic growth.
Looking ahead, the UK faces numerous obstacles to achieving faster economic growth, including low investment and savings rates, inadequate infrastructure, regional disparities, and an aging population. A comprehensive growth strategy must address these weaknesses to pave the way for sustainable economic recovery.
The Office for Budget Responsibility remains cautiously optimistic about productivity growth, but external factors and structural challenges necessitate a more proactive approach to fostering growth. The UK’s historic tendency to “muddle through” may no longer suffice, calling for a more resolute and targeted strategy to drive economic progress.
martin.wolf@ft.com
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