Where next for UK growth?

November 13, 2018

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by John Hawksworth Chief Economist

Email +44 (0)7841 803665

In the short term, economic growth is all about demand – consumer spending, government spending, business investment and net exports. In the long run, it is all about supply – productivity growth, population growth and the proportion of that population that is employed.

Short term demand can be volatile, and that has certainly been the case in 2018. Unusually cold weather held back UK growth in the first quarter of the year, but the economy picked up speed again in the summer months as warmer weather (and a revival in earnings growth) brought consumers out of their shells. This outweighed the drag on business investment from ongoing uncertainty about Brexit, pushing up quarterly growth to 0.6% in Q3.

But as the autumn set in, consumer spending growth has moderated and business surveys suggest that the Brexit effect on investment has reached serious proportions as the risk of a disorderly ‘no deal’ Brexit has loomed larger. Many companies reliant on European markets and supply chains have understandably put major new investment plans on hold until the fog of uncertainty has lifted.

Assuming a reasonably smooth Brexit, we expect a modest pick-up in UK growth from 1.3% in 2018 to 1.6% next year as businesses gradually start to invest again. But risks are weighted to the downside as the ‘slow growth’ scenario in the chart below makes clear.

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A disorderly Brexit could push the UK into at least a mild recession at some point over the next year, though our main scenario is that a deal will be done that avoids this outcome. Assuming that is the case, what is the outlook for growth in the longer term?

 

Long term UK growth trends and prospects for the 2020s

Andrew Sentance looks at UK growth prospects in a longer term context in a special article in our latest UK Economic Outlook report. As the chart below shows, the long term historical average has been for UK growth of just over 2%, though it was significantly higher than this on average in the second half of the 20th century.

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But UK growth has slowed to an average of just below 2% in the first two decades of this century (factoring in our main scenario for 2018-19), the lowest average rate seen in any decade since the 1940s. This has been driven, as in other G7 economies, by relatively subdued productivity growth of 1% or less, particularly since the global financial crisis.

If this recent slow productivity growth rate becomes the ‘new normal’ for the 2020s, then overall GDP growth could be held down to less than 2% per annum given the effects of an ageing population.

But, as we have argued in past research, there is potential to boost trend growth above these levels through investment in AI and related technologies, supporting older people who want to work for longer, and maintaining open trading relationships with the EU and globally after Brexit. Business and government need to work together to achieve these objectives if we are to get back to 2%-plus growth in the 2020s.

by John Hawksworth Chief Economist

Email +44 (0)7841 803665