W
ith Blur selling-out Wembley this summer, Britpop is cool again. But for the British public, nostalgia for the 1990s goes deeper than music.
Between 1993 and 2000, Britain averaged over three percent real GDP growth. It hasn’t managed that since. Issues of low productivity, decreasing competitiveness, and high debt have become a constant refrain. Add to this the issue of stubbornly high inflation, and the question is: Can the UK get its mojo back? After the oil shocks and Thatcherism, the mid 1990s and 2000s were comparatively halcyon days. Real GDP was rising, and unemployment fell from 10.3 percent in 1993 to 5.2 percent just before the 2008 global financial crisis. Inflation averaged two percent. Unemployment is lower still today, at 4.2 percent — but not as the result of booming economic growth. Real GDP growth averaged less than two percent between 2011 and 2019, and could be as low as one between now and 2025. At 9.4 percent in Q4 2022, inflation was at its highest level since 1990. “Prior to the 2008 global financial crisis, the UK had been a strong performer among the Group of Seven countries,” noted the IMF, “but this momentum was lost in the middle of the last decade.” Much of the UK’s economic growth in the 1990s and 2000s was driven by an increase in multifactor productivity (MFP). MFP is the mysterious residual increase in productivity after directly factoring-in the increases from labour and capital. According to the OECD, it contributed 2.1 percent of the 3.3 percent average nominal economic growth between 1995 and 2000. Other OECD countries — France, Germany, and the US — also saw strong MFP growth during the 1990s and 2000s. However, the UK’s increase from 1996 and 2003 stands out. Some economists ascribe much of this to the impact of the internet on the workplace. In the case of the UK, the impact of labour market reforms, financial deregulation, and privatisation under Thatcher must also be considered. So should the increased spending on education under Tony Blair’s Labour government. The Britain of the early 2000s was a more functional and vibrant economic setting than that of the early 1980s. As David Cameron put it: “When I stood on the steps of Downing Street for the very first time, I said I believe the best days for Britain lie ahead of us, not behind us.” Whatever the driver of UK MFP had been in the 1990s and 2000s, it didn’t last. Some call the gap between the global financial crisis and the pandemic “a lost decade of productivity”. The bold economic reforms and policies of Thatcher and Blair could not continue. The global financial crisis, then Brexit, stole all the air in the room. 48
3.5 3
Germany
%
France
United Kingdom
United States
2.5 2 1.5 1 0.5 0 1985 -0.5
1987
1989
1991
1993
1995
1997
Annual Growth in Multifactor Productivity from 1985 to 2007. Source: OECD -1 11. EU UK US 10. % 9. 8. 7. 6. 5. 4. 3. 2. 1. 0. Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 -1. Jul-20
1999
2001
2003
Jul-22
Oct-22
Jan-23
2005
Apr-23
2007
Jul-23
Inflation. Euro area, US, and UK. Source: EuroStat, US BLS, adn ONS
The governor of the Bank of England recently told MPs that Brexit had negatively impacted productivity and that its long-term impact could be as much as three percent. But Brexit and a lack of reforms cannot be blamed for stubbornly high inflation. It began to accelerate in the second half of 2021 as pandemic supply-side bottlenecks met pent-up demand. The Bank of England stepped in, and up went the interest rates. But compared with the euro area and US, it’s taking a while to come down. US inflation in July was half that of the UK’s. Britain’s prices have been disproportionately affected by the war in Ukraine because of reliance on natural gas and food imports. Gas heats 85 percent of UK homes and is the main source of electricity. North Sea production has been falling and the UK now imports around half its gas — making it vulnerable to global price shifts. Most of the imports come by pipeline from Norway, with sizable amounts of LNG coming from Qatar and the US. The war in Ukraine forced up the domestic price of gas per kilowatt hour sevenfold between July 2020 and July 2021. This was exacerbated by a series of nuclear power outages that summer. The gas price increased another 2.5 times in 2022; it has since fallen, but remains five times higher than July 2020. The has been felt by most of Europe, but the UK is unique in its reliance on food imports. In 2021, it was the world’s third-largest net food importer by value, behind the US and Japan. Taking population into account, it had double the imports of the US — and over 17 times those of Japan. The UK has also faced inflationary pressure from its tight labour market. Its unions CFI.co | Capital Finance International
are stronger than those in the US and less cooperative than those of Germany. The Bank of England will have to raise rates, and hold them for longer. Current forecasts do not see inflation falling to that two percent target until 2025. This is bad news for economic growth, which despite the recent material upward revisions for 2021 (a 1.1 percent increase in real GDP), has been flatlining since Q2 last year. Turning things around will need some bold reforms and policies. In the words of the IMF, the “UK’s long-run prosperity hinges on ambitious reforms”. The IMF prescribes tax incentives to encourage infrastructure investment, relaxing restrictions on pension funds, streamlining planning laws, and increased investment in education and business innovation. Prime Minister Rishi Sunak is a believer in innovation and entrepreneurship. But in his first Budget, he had to deal with a £55bn deficit and the shadow of the Truss administration; he was forced to increase taxes. In the Spring Budget, he unveiled increased childcare support, full capital expensing for businesses, and support for R&D. None of these measures was revolutionary. They were mostly designed to curry electoral favour. If the UK is to go back to the future with a decade of productivity and economic growth, it will need to be more ambitious. Sunak has time before the 2025 general election to get creative with policy; otherwise, it will be up to Labour. If both parties try to campaign on economic management and fiscal responsibility, the UK economy could be more Parklife than Supersonic over the next decade. i