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The U.K.’s Woes Are About More Than Just Brexit

Published 10/11/2019, 05:47 AM
Updated 07/09/2023, 06:31 AM

Anyone who argues the U.K. has not been impacted by its decision three years ago to leave the European Union only has to look at the figures to see how wrong that argument is.

The Financial Times reported this week that the U.K. narrowly avoided a recession this summer, as Q2’s contraction was followed by a minuscule bounceback in Q3 thanks to a pick-up in services, which grew at 0.4%.

Manufacturing, however, as anyone in the metals industry will know only too well, remained in recession, contracting by 0.7% in August compared to last year, according to the Financial Times.

Commentators put this down to uncertainty over what Brexit will look like and when it will happen, hindering plans for investment and creating an atmosphere of uncertainty and retrenchment.

Set this against a possibly more worrying trend for the U.K. and you have to ask what the longer-term prospects are for the economy.

An earlier Financial Times article this week explored the longer-term fall in productivity that has held back wealth creation since the financial crisis.

In the U.K., productivity has stagnated since the 2008 financial crisis, the Financial Times reported, failing to recover as it typically does following contractions.

Moreover, it has weakened since the 2016 Brexit referendum and contracted in the past year; productivity contracted in the second quarter at the fastest pace in five years.

According to the Financial Times, many economists and businesspeople point to the lack of business investment as a reason for deteriorating productivity. Business investment has barely expanded since the second quarter of 2016 and contracted 0.4% in the three months to June, suggesting Brexit and falling productivity are a conjoined crisis, with one supporting the other.

Businesses have preferred to hire workers than invest, so unemployment is low and that’s what grabs the headlines, but the inability to increase the value of goods and services produced per hour of work limits what companies can afford to pay their workers — so, living standards stagnate.

UK Productivity

Utilities and construction were the only sectors that recorded a rise in productivity, while output per hour fell 1.9% in the manufacturing sector and by 0.8% in the services sector. Services account for about 80% of the U.K.’s economy.

Nor is the U.K. simply suffering the same problem as everyone else.

Since the second quarter of 2008, the U.K.’s lack of productivity growth contrasted with an average 9% expansion in labor productivity for the 36 member countries of the OECD.

It is hard to see what will break the cycle.

Supporters of Brexit talk about the U.K. being transformed into a low-tax tiger, like Singapore, post-Brexit.

Realistically, most see that as unlikely.

Even if taxes were to be dramatically reduced, with the expected new immigration controls and low unemployment, labor could begin to get tight and wages could rise sharply. If that were not accompanied by a sharp uplift in GDP, the U.K. could be caught in a deflationary trap, with low-cost, tax-free imports causing major disruption to domestic producers.

No wonder the issue of Brexit has the public and politicians so divided.

Unaware, as most are, of the U.K.’s low productivity growth, the long-term impact has been the very stagnation in living standards that has in part fueled the desire to leave the E.U. and search for a brighter future.

Good luck with that.

by Stuart Burns

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