Is the UK lagging behind other G7 economies?

09 July 2012

By John Hawksworth and Yong Jing Teow

The experience of the UK economy over the recovery period since mid-2009 has been relatively disappointing: growth seems to have stalled, inflation has remained stubbornly above target, unemployment has increased since early 2011 and productivity growth has been sluggish.

This might be explained by adverse international shocks from the Eurozone crisis and earlier global commodity prices rises apart from the fact that the UK’s performance has also been relatively poor since mid-2009 compared to most other G7 economies. However, while this comparatively disappointing recent UK performance has been the focus of many commentators, it is also important to note that the recession was preceded by a decade of relatively strong UK output and productivity growth accompanied by low inflation and unemployment .

The chart below helps to set this in a historical context: it shows the average annual real GDP growth of the G7 economies over three distinct phases of the economic cycle, namely the economic expansion in the decade up to the crisis (Q4 1997 to Q4 2007), the deep recession that followed (Q1 2008 to Q2 2009) and the subsequent recovery1  (Q3 2009 to Q1 2012). We look at the G7 economies as comparators as they are all reasonably large economies that share broadly similar levels of economic development as the UK.


Click the image to view a larger version

In the decade before the crisis, the UK recorded the second highest level of growth in the G7, just behind Canada but ahead of the US, Japan and the largest Eurozone economies. The UK’s performance over this period was supported by superior levels of productivity growth together with low and declining unemployment rates.

This ‘golden decade’ came to an abrupt end during the recession, which hit all of the G7 economies hard but the UK more than most in terms of GDP – although our performance on unemployment was better due to our relatively flexible labour market. Since the deep recession ended in mid-2009, however, we have lagged behind most of the G7, with only Italy seeing slower average growth over this period.

Will this relative UK under-performance continue over the next 5-10 years? We think not, seeing it rather as a period of necessary correction following the credit-fuelled over-exuberance of the pre-crisis decade. UK growth will not be spectacular going forward with a ‘new normal’ where trend growth is approaching 2% rather than close to 3%, but based on projections by the IMF and others this is still likely to be better on average than Japan and most Eurozone economies and not far behind the US and Canada.

Businesses should therefore not despair of a recovery in the UK domestic market, although the fastest longer term growth prospects will clearly continue to be in the BRICs and other emerging markets.

1This recovery has faltered recently in the UK and some other G7 economies, but there has been no retreat yet into severe recession in any of these countries, so it still seems to make sense to look at the period since mid-2009 as a whole as one of post-recession recovery.

These and other comparisons of UK and G7 economic performance and prospects are documented in much more detail in an our latest UK Economic Outlook report.


John Hawksworth  |  Tel: +44 (0)20 7213 1650

Yong Jing Teow  |  Tel: +44 (0)20 7804 4257



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