Economy & the cost of living

Britain’s economy is in a bad way. Almost every forecaster agrees that the country is in recession, with debate shifting to how long the downturn will last. Yet even as output falls, inflation remains uncomfortably high (10.7 per cent), leading to a deep squeeze of household incomes. Taken together, 2022 and 2023 look likely to be the worst two years for living standards since the 1930s. For the first time in decades, the Bank of England, which worries that inflation is becoming entrenched, has found itself raising interest rates (to 3.5 per cent) in the face of a coming recession. High energy prices, the end of cheap money and post-Covid supply chain woes are far from a uniquely British experience. Such problems afflict all advanced economies to a greater or lesser degree. But increasingly, economists are coming to believe that the UK will be hit harder. Forecasts compiled by Consensus Economics, a consultancy, point to a 1 per cent fall in British GDP in 2023 compared with a drop of just 0.1 per cent in the eurozone and weak growth in the United States (0.25 per cent). The OECD forecasts that only Russia will perform worse than the UK among the G20 economies. https://youtu.be/R5g_S9BBtqw Watch: Duncan Weldon speaks to Will Dunn (produced by Hugh Smiley) The problems run far deeper than a bad year or two. The acute living standards crisis of the early 2020s follows a slow-burning productivity crisis since the 2008 crash. British productivity growth, the ultimate driver of higher GDP and living standards, has been abysmal. In the decade between 1997 and 2007, the UK enjoyed the second-highest productivity growth of any G7 economy (1.8 per cent), behind only the US. In the decade between 2009 and 2019, it slumped to the second-weakest performance (0.4 per cent), ahead of only Italy. Economic stagnation since the crash and, now, the highest inflation for 40 years, are expected to leave median real wages below their 2008 level until 2027. The costs of economic failure amount to almost two decades of lost growth for workers. Britain faces a period of relative decline – a deeper recession and a slower recovery than its peers. The end result will be a country that is significantly poorer than them. It is tempting to think of this as nothing new. That, though, would be not only misleading but dangerous. In one respect, the economic history of Britain since the mid-19th century has been a story of relative economic decline. As the birthplace of the Industrial Revolution, Britain was the first country to experience modern economic growth on a grand scale. From the mid-18th to mid-19th century, as the country industrialised, it forged a lead over its rivals. But this could not last forever. Given access to the same technology and the same production techniques, other countries were always destined to catch up. Twice in the last two centuries, this process of relative decline has caught the sustained attention of Britain’s political elite. In the late Victorian and Edwardian years before the First World War, the rise of North American and German industrial output was seen as undermining the UK’s place in the global economy. Foreign-made goods appearing in British shops were a particular cause for concern for those governing a country that still thought of itself as “the workshop of the world”. Ernest Edwin Williams’s protectionist polemic Made in Germany was a bestseller in 1896. Lacking reliable economic statistics, a series of royal commissions were formed to investigate just how bad the decline actually was. A second major bout of declinist anxiety was witnessed in the post-Second World War period. As the West German economy underwent its miracle, or Wirtschaftswunder, and France enjoyed three decades known as Les Trente Glorieuses, the easier availability of comparative economic statistics provoked renewed talk of relative British decline. This included Marxist historians such as Perry Anderson and Eric Hobsbawm on the left and conservative historians like Correlli Barnett on the right. The so-called British disease was usually defined as weak productivity growth but the causes were variously identified as toxic industrial relations, poor-quality management, weak investment or an elite that was hostile to science and technology. But for all the national handwringing about Britain’s 1950s, 1960s or even 1970s, the country recorded growth rates far ahead of those since 2008 (3.4 per cent in the 1960s and 2.6 per cent in the 1970s, compared with 1.9 per cent in the 2010s). While historical analogies with the current period of decline are easy to reach for, they conceal as much as they illuminate. A look back at the last two declinist episodes reveals two striking differences. Firstly, there is the question of the scale of the problem. The current crisis, as the historian Adam Tooze has noted, is uniquely bad in modern – that is to say post-Industrial Revolution – British economic history. Work by Nick Craft and Terence Mills suggests that productivity growth has slowed to a pace not seen in two centuries. The reasons are varied. The global financial crisis of 2007-09 hit the UK especially hard. The turn to austerity in 2010 slowed the post-crash recovery. Brexit – both by leading to postponed and cancelled investment, and hindering Britain’s relationship with its nearest and largest trading partner – has been another drag on performance. The economic impact of leaving the EU is akin to slowly puncturing the tyres of a car. But the trouble runs deeper: even before 2016 it was clear that the engine was having serious problems. The second difference is more alarming. At the turn of the 20th century, the supposed problem of decline saw politicians competing with new visions of how to organise the economy to address the problem. The Tories turned to protectionism and the Liberals to the nascent welfare state. The 1960s and 1970s saw the Bennite Alternative Economic Strategy and the birth of what became Thatcherism. This time around, even though the crisis is materially worse, Britain’s political elite seems unusually timid. Painful decline is being meekly accepted. [See also: Boris Johnson’s comeback is dangerously plausible]

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