Is the UK economy ailing? Seven charts that show it’s not that bad, actually
Many commentators paint the UK as the sick man of Europe. By most measures — from debts to growth, productivity and unemployment — it’s just not true
If you believe Mel Stride and his Conservative Party colleagues, Britain is a uniquely impoverished economy run by a uniquely incompetent chancellor. But while it has suffered at the hands of the bond market over the past fortnight (before a rally on Wednesday), is this country really “an outlier”, as the shadow chancellor claimed? How does Britain’s economy stack up against the leading nations in Europe and the US?
Professor Martin Jacob, of the IESE Business School, a German based in Spain, said: “Relative to the US and some countries in Europe, the UK is lagging behind with sluggish growth and high debts, but it’s got very similar problems to Germany and France. And like them, it really requires a policy shift that will not be popular.”
Having been brought to its knees in the sovereign debt crisis, it is now Spain that is Europe’s “poster child” economy.
We scored Britain against major European economies, the US and Sweden, as a proxy for the Nordics, to see how bad we really are.
Gilt-y as charged
It is not only Britain’s sovereign debt on which interest rates have leapt over the past two weeks; bond yields in all major economies jumped in lockstep with the US. The problem is that Britain has relatively high debt and is constrained on spending by the high price of meeting the chancellor’s fiscal rules.
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Deutsche Bank economists have highlighted another key measure, the “i-g differential”, which measures the difference between the interest rates paid by a government on its debt and the growth rate of the economy. For the past three decades, Britain has been in the bottom to the middle of the G7 pack, but now finds itself at the very top, Deutsche says. To return to the norm, Reeves must either take unpopular fiscal actions to get the debt down, or grow the economy.
Not the daddy of debt
The UK is far from alone in running up debts. Indeed, data from the International Monetary Fund (IMF) shows that Spain, France, Italy and the US all have higher levels of debt, compared to the size of their economy. The UK’s debt-to-GDP ratio has risen in lockstep with that of the US for two decades.
It’s a similar picture with the budget deficit. France and Italy are both in breach of the EU’s demands that members must not allow their deficit to get bigger than 3 per cent of their GDP. Germany and Sweden, both traditionally wary of running up debts, are outliers in the healthiness of their bank balances.
Rough trade
Measured by its current account deficit — the difference between what it imports and exports — the UK is not looking so pretty. For a long time, it been a net importer of energy, food and other goods, unlike the manufacturing powerhouse of, say, Germany at the other end of the scale. Remainers argue that Brexit has not helped here.
Deutsche Bank points out that higher global energy prices at the start of the year will add further pressure, and the IMF expects Britain to remain at the bottom of the pack for the foreseeable future.
Beating Germany
Britain’s economic growth is pretty much flat, with only 0.1 per cent expansion in November. While that’s far from good, it’s not the worst in the G7 by any means. As Professor Jacob said: “Britain is far from alone in struggling with its budget — at least the economy is growing faster than in Germany, where they have just had two years of recession.”
Due to high energy prices and falling demand in China for its cars and other manufactured goods, the German economy is startlingly weak. Spain, in contrast, is growing rapidly, with strong growth in tourism on its coasts, manufacturing in the north, and financial services in Madrid, which Jacob said had taken market share from the UK since Brexit. Spain’s property and construction sectors are also robust.
Job winner
Britain has one of the lowest rates of unemployment — a definite success story relative to its peers. Michael McMahon, professor of economics at Oxford University, said Britain has halved its jobless rate since the financial crisis, adding that wages in real terms have also grown recently. Like Germany and the US, a bigger problem has been finding new recruits to fill jobs.
Spain has the highest unemployment, which seems to be at odds with its rapid growth. Some economists argue that this belies the true picture in a country where many people work “off the books”. Immigration from Latin America is fuelling the workforce as people from the continent try their luck in a country connected by language and culture.
Germany, meanwhile, has struggled to attract skilled migrants due to the language barrier — a factor that some fear will become a big headache as the country’s ageing workforce retires.
Productivity in line
Britain beats itself up about its poor productivity record since the financial crisis, but it ranks broadly in line with the G7, albeit lagging France, Germany and the US for output per hour. Britain’s service-based economy should put it ahead of countries such as France, where there is more manufacturing and agriculture. But while Britain’s record improved dramatically as it moved from an industrial economy to services, it has failed to keep up the pace.
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Weak business confidence, and a resulting lack of appetite for risk taking, has led to a big drop in the amount invested by UK firms in their operations.
Some hope that Labour’s moves to make employing people more expensive and inflexible will drive firms to invest in automation, while cutting City red tape could help, too.
Fuel for inflation
Inflation in the UK was among the worst during the grimmest days in the aftermath of Covid, but it has since come back under control to be towards the bottom of our comparator group. Broadly, Britain has been in the middle of the G7 pack since the Bank of England was given its independence in 1997.
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That said, Britain’s electricity costs, both for consumers and companies, are extremely high. Numerous factors, particularly our reliance on imported gas and less generous subsidies, add to the price. Industrial companies using a lot of energy cite this as a key reason why the UK is not seen as an attractive place to situate their plants. Electricity is also priced according to the price of natural gas, meaning that Britain’s success in building cheap renewable energy generation is not entirely reflected in bills.
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