The U.K. economy is the world’s fifth-largest and Europe’s second-largest after Germany. London is a major financial center, and Britain is an energy producer and a vigorous global trader. What happens here matters to the rest of the world. So it matters that the British economy today is, to put it delicately, a hot mess.
This week saw news of a second consecutive monthly economic contraction, of 0.3% in April following a decline of 0.1% in March. Inflation is running at 9% and so far has proved impervious to the Bank of England’s belated efforts to normalize monetary policy. A benchmark interest rate now up to 1.25% from 0.1% in December has yet to have a discernible impact.
Instead, as of last week it cost £100 ($121) to fill the tank of the average family car, and households, whose energy prices shot up 54% in April, are bracing for another 40% price rise when the regulatory price cap next comes up for review in October. Real wages fell 3.4% in April compared with a year prior, the steepest decline in two decades.
The Organization for Economic Cooperation and Development expects the U.K. to be the worst performer among major economies next year, with zero growth. British businesses and consumers have internalized the gloom, and confidence is falling. Oh, and the country is likely to be hit with its worst rail strike in 30 years later this month as unions resist layoffs in the face of falling passenger demand.
National economic sob stories are a depreciated dime a dozen these days, so it’s fair to ask what makes Britain’s so special. The answer is that the U.K. ought to be boasting the developed world’s brightest prospects right now rather than the worst.
Like the U.S., Britain benefits from a legacy of economic reforms in the 1980s. Unlike America, the U.K. currently is governed by the party—the Conservatives—that engineered that overhaul a generation ago and is supposed to understand economic growth. That same party orchestrated Britain’s departure from the overtaxed, overregulated European Union on a promise that Brexit would trigger a new burst of economic energy. This should be a golden age, even with the vicissitudes of global energy prices and war in Ukraine.
What a bust. The Conservatives under Prime Minister
are saddling the economy with higher taxes on labor (both income and payrolls) and corporate profits. They can find time to require private landlords to accept pets in their rental properties, but claim post-Brexit red-tape cutting would be an intolerable administrative burden.
This column normally resists describing policies as “stupid” on the theory there’s usually some underlying political-economy rationale no matter how obscure. But here there doesn’t appear to be any logic.
Instead the Tories are stumbling back into the general economic formula they followed under Prime Minister
David Cameron.
This consisted of irritable gestures in the direction of economic and governance reform (the most worthwhile of which was an overhaul of social-welfare benefits for working-age people) while uncontrolled inflation boosted “competitiveness” via a catastrophic reduction in real unit-labor costs.
In layman’s terms: Inflation reduced inflation-adjusted wages by around 6.7% between 2009 and 2014. The growing gap between nominal profits and real wages created an illusion of global competitiveness that lured moderately more business investment and stimulated headline growth in gross domestic product, although conspicuously never enough to boost productivity in a way that would turn illusion into reality.
Similar policies inflicted on Greece were widely derided as a terrible social injustice. In the U.K. economists instead mused over a phenomenon described as a “productivity puzzle” even though it wasn’t puzzling at all if one accounted for Britain’s business-unfriendly taxation and regulation. Mr. Cameron’s economic failures contributed to the broad if inchoate discontent that fueled the vote for Brexit in 2016.
Whether a repeat of that miserable experience can be avoided will be the great preoccupation of British politics for the foreseeable future. Alas, signs aren’t great for a rapid turnaround. The Tories have been in power for 12 years, which is the point in any political cycle when rot becomes more likely than renewal. Labour under leader
Keir Starmer
has moderated the worst socialist impulses of its previous chief
Jeremy Corbyn,
but only just. They’ve all got a lot of work to do.
One thing that could help—economically, intellectually and perhaps even spiritually—would be a turnaround in the U.S. The trade-and-investment boon of a stabilized American economy (perhaps with more energy production to boot) is Europe’s best hope at the moment, and Britain would be well-positioned to absorb policy lessons from an American revivification.
A U.S. rejuvenation will not come from the Biden administration or the current Congress, however. This raises the uncomfortable prospect that Britain, rather than being master of its own post-Brexit fate, finds a lot riding on American midterm elections in November.
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
