UK economic prospects, the productivity challenge and migration after Brexit

14 November 2017

By John Hawksworth

Global growth has picked up to over 3% this year, but UK economic growth has slowed to around 1.5% due in particular to the squeeze on consumer spending power from higher inflation. UK business investment growth has also been slower than might have been expected given the favourable global environment and continued historically low interest rates (despite the small rise in UK bank rate in November).

While we don't see a recession ahead, our latest UK Economic Outlook report does project continued sluggish UK GDP growth of 1.4% over the next year as consumer spending growth decelerates further to only around 1% (see chart below). All UK regions are projected to see relatively modest growth in 2018, with London no longer standing out from the pack.

Ukeoconsumergrowth

Brexit-related uncertainty will continue to act as a drag on business investment in 2018, although there should be some offset from stronger UK export growth as the global and Eurozone recovery continues, and somewhat higher public investment (including in new affordable housing).

The longer term productivity challenge

Longer term, productivity growth is critical to rising living standards but, since 2010, this has been weaker in the UK than any other G7 economy except Italy (see chart below). In part, this has been the flipside of relatively strong UK jobs growth in recent years, but in the long run the UK also needs to boost productivity levels if we want real wages to rise at anything close to the 2% average annual rate achieved in the pre-crisis years.

Ukeoproductivitygrowth

As argued by Andrew Sentance, our senior economic adviser, addressing the productivity challenge requires a modern industrial strategy that boosts skills and infrastructure investment and supports innovation, including in new digital technologies like AI and robotics. As discussed further in a previous report, such a strategy could boost UK productivity materially in the long run.

Implications for the Budget

Realistically, however, any such strategy will take many years to have its effect, so slower productivity growth is likely to continue to dampen growth in UK GDP and tax revenues over the next few years. This will restrict the scope that the Chancellor has to ease austerity in his Budget on 22 November while still hitting his fiscal targets. So any fiscal giveaways in the Budget on priorities like health and housing may be largely offset by clawbacks elsewhere.

Migration after Brexit

Migration is also a key longer term issue for the UK economy looking beyond Brexit. Our analysis shows that some regions, particularly London, have become critically dependent on EU workers over the past decade. This also applies to industry sectors such as food manufacturing, hotels and restaurants, warehousing, healthcare and construction where workers from other EU countries have become essential to the operations of many UK businesses and indeed the NHS and local social care services.

Future migration policy needs to reflect these facts both in terms of allowing existing EU workers to stay in the UK without undue red tape, and in terms of setting criteria for work visas after Brexit that recognise the great contribution that migrants from the EU and beyond can make to filling skills gaps in the UK. This is particularly important given that the native UK population is ageing, so we need injections of fresh blood to keep our economy growing at a reasonable pace.

You can get more details of our analysis on all these issues by visiting our website, www.pwc.co.uk/ukeo, where you can download our full UK Economic Outlook report and explore migration trends further for your region.

John Hawksworth:
Read profile | Contact by email | Tel: 020 7213 1650

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