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The U.K. begins life outside the European Union burdened by economic ills that have gone unresolved for more than a decade.
From anemic growth to wage stagnation, the problems broadly come down to the abject weakness of productivity since the financial crisis. Each hour worked today is delivering just 2% more economic output than it did at the end of 2007, making Britain one of the worst performers among Group of Seven nations.
The challenge is not lost on Prime Minister Boris Johnson, who has pledged to lift growth to pre-crisis rates and “level up” under-performing regions of northern England and the Midlands. But there is no quick fix, as the Bank of England vividly illustrated on Thursday when it delivered the biggest downgrade to its forecasts since the aftermath of the Brexit referendum in 2016.
Nowhere has the productivity malaise been felt more keenly than in wage packets. Living standards are only now returning to the levels they reached in early 2008. Had real earnings instead maintained their pre-crisis trend, the average worker would be more than 7,000 pounds ($9,200) a year better off today. A tight labor market should sustain nominal earnings growth above 3% -- faster than inflation -- but feeble growth in output per hour places limits on the pay increases firms can offer their workers.
Britain has relied heavily on a plentiful supply of labor to drive the economy, with more than 3 million jobs created over the past six years. Many people, including older employees, found themselves needing to work to make up for the squeeze on earnings. Now there is little slack left and post-Brexit immigration curbs could exacerbate the shortage of potential workers. Faster economic growth will require companies to get more out of their existing staff.
Johnson is throwing off austerity and preparing to spend in an effort to galvanize growth. If he delivers on his election pledges, the economy could get a significant fiscal stimulus equal to more than 1% of GDP next year. Much of it will come in the form of extra infrastructure spending, which does more to lift output than money spent on public services. The government is hoping to kick-start private investment that has been on hold amid the uncertainty over Brexit. All eyes will be on Chancellor Sajid Javid’s March 11 budget.
Johnson won the election by persuading working-class, pro-Brexit voters in traditional Labour heartlands to back his Conservative Party for the first time. As he attempts to shift the political agenda away from looming trade talks with the EU and toward domestic issues, the premier is promising to tackle the wide disparities between regions. London and southeast England significantly outperform other parts of the country, with the productivity gulf no narrower than it was in 2008.
With characteristic exuberance, Johnson says his goal is to “unleash Britain’s potential.” His critics fear the country could be left in the past if Brexit damages commerce with its biggest trading partner and deprives the economy of productivity-enhancing foreign skills, innovation and investment.
To contact the reporter on this story: Andrew Atkinson in London at a.atkinson@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Alaa Shahine
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