Seven indicators that show where we are relative to our neighbours:

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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

Feeling the chill? Shadow chancellor Mel Stride said the UK economy has been frozen out by its competitors

JUSTIN TALLIS/GETTY IMAGES

Matilda Davies

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Jim Armitage

Sunday January 19 2025, 12.01am, The Sunday Times

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.

• British bonds are going cheap. Maybe it’s time to buy some

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.

• Could higher employment costs shock firms into raising productivity?

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.

• Lower than expected inflation raises hopes of interest rate cuts

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.

Something optimistic about our energy future

 

New Malthusians are wrong: a rich world needs less energy than once feared

An untruth has led us to believe net zero is near impossible

AMBROSE EVANS-PRITCHARD18 April 2024 • 5:57pm

Related Topics

• Energy, 
• Renewable energy, 
• Geothermal energy, 
• Hydro-Electric energy

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A cardinal fallacy reigns over the debate on green energy and global decarbonisation. It taps into deep Malthusian instincts and creates near universal confusion.

It causes well-educated people to accept the claim that stabilising greenhouse emissions by mid-century will prove to be a near impossible task. It contaminates economic models and explains why the UK Treasury and other bodies – though not the Energy Institute – cling to exorbitant estimates of what it will cost.

There are, of course, many obstinate fallacies in this controversy. The most common is to conflate “flow” and “stock”, much exploited by those engaged in predatory delay. The constant extraction and shipment of coal, oil, and gas, day after day, to feed the existing energy order is not the same as the one-off demand of mined minerals for a lithium battery that will be recycled. 

A close rival is to conflate “investment” and “cost”. Investment delivers a return, and clean-tech pays for itself with a high multiplier.

These are known fallacies. The larger silent fallacy that subverts all else is the notion of “primary energy demand”, promoted by the International Energy Agency (IEA) during the oil shock of the 1970s. It shaped a generation of academics and energy analysts, and still informs IEA reports. 

In a nutshell, it assumes that we have to replace all the energy extracted from hydrocarbons. It seems an obvious truism, except that we do not need to do any such thing. Two-thirds of fossil energy is currently wasted, mostly in thermal heat lost to the air.

Cutting-edge research suggests that we will require just 40pc to 45pc of today’s total energy supply to replace the old system, and to lift the global South, and to satisfy the voracious demand of data centres, all at the same time. So rejoice.

“The entire decarbonisation challenge is far smaller than is made out by its critics. Primary energy demand, irrespective of how it’s defined, is simply not a matter of any importance,” said Michael Liebreich, global technology guru and founder of Bloomberg New Energy Finance.

If you light your study with a 10-watt LED bulb powered off wind or hydro, you consume 95pc less energy for the same light as a 75-watt incandescent bulb powered by a coal plant working at 37pc thermal efficiency. Real life usually falls between these two theoretical extremes, but you get the picture.

The LED bulb will last 15 or 20 times longer. It will not lose 80pc of its energy in heat. It will not set the lampshade on fire. Bingo.

Mr Liebreich offers a grand summary of the bullish case in Five Superheroes of the Transition, part of his “Cleaning-up” series of energy podcasts. The obstacles are serious, but they loom larger in our minds than they really are.

As we electrify everything that can usefully be electrified, the need for primary energy will fall mechanically. We lose roughly 15pc of the power generated by renewables, factoring in losses from conversion, transmission lines, the grid, etc – a loss rate that keeps thinning with technology.

If you switch from a VW Golf to an electric VW ID3 charged at night off British wind, or charged during the day off Australian solar, you cut primary energy use by 75pc at a stroke.

I hate to mention heat pumps, a peculiar bone of contention in the idiosyncratic British culture war, but when it comes to primary energy, the energy science is unanswerable.

Like them or not, they have a performance coefficient near four. They cut demand for primary energy by almost 80pc, adjusting for the relative variables of upstream losses and furnace efficiency of gas boilers versus grid loss for electrification.

The beauty of ground source heat pumps for office buildings, blocks of flats, or light industry is that the ground itself acts as a giant battery in non-tropical climates. It does half the work of heating in winter and of cooling in summer. 

Some 15pc of the world’s primary energy demand is to extract and refine oil and gas, so that will partly disappear. Fossils account for 40pc of the world’s blue water shipping. That, too, will be slimmed down to residual needs for chemicals or long-haul aviation (perhaps).

“It will be sold for salvage,” said Mr Liebreich. Oil and gas pipelines will be recycled for scrap, lowering iron ore demand.

Will we run out of lithium? An enduring myth has taken hold that just 5pc of lithium batteries are recycled. It tracks back to a report by Friends of the Earth from the early 2010s, which divided newly manufactured EV batteries by the number of old ones collected. It has been repeated uncritically by the press ever since, and even by Nature Energy as recently as April 2019. 

Obviously, there were almost no end-of-life EV batteries to collect a decade ago. The definitive report for the Swedish Energy Agency by Hans Eric Melin estimates that the true recycling rate today is 90pc and heading for 99pc. Minerals in batteries are too valuable to waste.

When you combine recycling rates at such levels with gains in battery technology – solid state batteries with three times the energy density may be hitting the market by 2030, or soon after – you reach perfect circularity. You have all the lithium you will ever need, and the same logic applies to copper. As for cobalt and nickel, the new LFP batteries conquering China need neither. 

Do we really need to keep 30,000 dairy cows locked up in single hangars in China, never seeing pasture or daylight, feeding on Brazilian soy to produce milk when we can make bio-identical milk, with no antibiotics or steroids, in precision fermentation vats using a fraction of the lifecycle energy, 96pc less water, and emitting no methane? No, we do not. Nor will once cellular agricultural costs fall below griddle parity.

Without straying too far into exotica, the latest semiconductors using graphene or silicon carbide cut electricity use of certain processes by orders of magnitude. Breakthroughs in gallium nitride promise to replicate the LED lighting revolution, this time in power electronics, cutting losses from solar inverters by 40pc, and cutting energy use for EV charging by 70pc.

Superconductors are coming of age. Scientists at MIT have developed a nanoscopic diode that aims to slash the energy needed to cool data centres, currently projected to gobble up 20pc of the world’s power by the end of this decade if nothing is done. Something is being done.

We can talk ourselves into paralysis, but once we grasp that the twin concepts of primary energy demand and exponential mineral demand are both false, the obstacles fall away. We will not need nearly as much of either as we once thought.

A great synopsis of the way politics interferes with sound economics

 As you read this think about the elements you could bring into an essay - the difficulty with lost skills, for example. There is a nod at the end to changing the VAT treatment of independent schools if you can make the connection:

ANALYSIS

The nobbling of Britain’s nuclear energy sector

The UK once led the world in atomic power, but now it’s a has-been. The malaise is due to the left’s opposition to the sector and decisions taken by the Blair government. Max King explains 

THE COST OF NEW NUCLEAR POWER STATIONS SUCH AS HINKLEY IS NOW FAR HIGHER THAN IT SHOULD BE

You don’t have to be a faithful follower of the net-zero advocates to believe that reducing the UK’s dependence on imported hydrocarbons and encouraging others to do likewise is an economic imperative. 

There is a mountain of evidence that the possession of hydrocarbon wealth is responsible for corruption, aggression, repression, economic mismanagement; it undermines enterprise in countries that are “blessed” with it. These include Russia, Iran, Venezuela, Saudi Arabia and Nigeria, for whom it has financed extravagance for the few while helping to create misery for the many. The other losers are the hard-working and entrepreneurial people of countries that have to overpay for their energy.

Renewable energy has made an important contribution to reducing the UK’s dependence on hydrocarbons. But it can never be more than a partial solution. Despite falling costs and improving technology, output is limited by the unreliability of the weather and the challenge of low-cost storage. Expensive back-up generation is needed, as well as a reliable base-load supply.

Since the opening of the first nuclear power station at Calder Hall in 1956, that has been provided by nuclear energy. At its peak, nuclear provided roughly 30% of Britain’s electricity, but now the figure is less than 15%. That fall is the result of the closure of the original Magnox-type reactors and the failure to replace them with sufficient new capacity.

That failure is widely blamed on the Coalition government ducking the issue 12 years ago. But by then the damage to Britain’s capacity to build new nuclear power stations had been done. Besides, the Coalition government did much to accelerate the growth of renewable energy. The real culprit for the nuclear failure was the Blair government that took office in 1997.

The Major government had privatised British Energy, comprising the eight most modern of Britain’s nuclear power stations and various other nuclear assets, the previous year. British Energy acquired a coal-fired power station with a capacity of 2,000 megawatts in 2000 and a majority stake in a large Canadian nuclear power generator in 2001, both to diversify its exposure to the risks of UK nuclear.

ENEMIES WITHIN

By then, British Energy’s enemies in government were conspiring against it, led by Michael Meacher, a left-wing ideologue and the Minister of State for the Environment. He was egged on by Zac Goldsmith, then a leading environmental activist but later a Conservative MP, minister and now a peer. 

The left’s opposition to nuclear power was based on its role in undermining the historic near-monopoly of coal in energy generation to the detriment of the coal miners, the Praetorian Guard of the Labour left. Without nuclear, they thought, the miners’ strike of 1985 would have succeeded. Nuclear energy also suffered from its name association with nuclear weapons, and CND (the Campaign for Nuclear Disarmament) was a leading left-wing cause. Environmentalists are and always have been divided on the issue of nuclear power, torn between solidarity with like-minded people overseas and rational analysis.

“BRITISH NUCLEAR FUELS LIMITED WAS A WORLD LEADER IN REPROCESSING SPENT FUEL” 

British Energy ran into financial difficulties in 2002 owing to a slump in the wholesale price of electricity, itself the result of the “dash for gas” in electricity generation caused by a glut of natural gas. This was exacerbated by the discriminatory levying of business rates, a result of the state’s refusal to exempt British Energy from the “Climate Change Levy” (despite nuclear energy being low-carbon). It required British Energy to provide for and set aside money for “back-end fuel costs” (reprocessing and disposal)and decommissioning. There was no comparable decommissioning levy on conventional power stations.

Historically, “back-end fuel costs” hadn’t been a problem, because spent fuel was reprocessed and re-enriched by BNFL (British Nuclear Fuels Limited) at Sellafield. Around 96% of nuclear fuel can be recycled through reprocessing. 

CLOSING A MAJOR ASSET

BNFL had been set up in 1971 as a business operating independently from government but owned by it. Turnover in the mid-1990s was £1.5bn-£2bn a year, up to half from overseas, and BNFL was very profitable, paying a dividend to the Treasury in 1996 of £60m. Japan was a major customer (BNFL accounted for 10% of all the UK’s yen earnings) but Germany, Sweden, Switzerland and Belgium were also significant.

“BNFL was a world leader in the management and reprocessing of spent fuel,” says Neville Chamberlain, former CEO. “Had it been allowed to continue, turnover would be a multiple of what we achieved in the 1990s. Closing it was a massive lost opportunity for a world-leading business with excellent prospects, and did untold damage to Britain’s reputation overseas.”

The first step towards closure was actually taken in 1993 by Michael Heseltine, then president of the Board of Trade, when he brought it under Treasury control. As Lord King, chairman of British Airways in the 1980s, said, “government is totally unsuited to being the proprietor of a commercial enterprise”. So it proved with BNFL, with “the department behaving in an anti-nuclear way”, according to Chamberlain.

The Blair government decided that reprocessing the spent fuel for the older Magnox power stations would continue but there would be no reprocessing for the more modern plants, with the spent fuel being very expensively stored instead. This significantly increased British Energy’s costs. British Energy also asked for the life of the Magnox power stations to be extended as the best way to manage and pay for decommissioning. This was only allowed after the government had seized control of British Energy.

In 2002, British Energy approached the government for financial assistance to cover what it believed was only a short-term drop in revenues. The government insisted that British Energy, which had no choice but to generate electricity flat out because nuclear power plants can’t be turned on and off at the flick of a switch, should be subject to fluctuating short-term prices, not contractual long-term ones. This policy was not applied to renewable energy.

The government came up with a restructuring plan to enable it to seize control. It was supported by British Energy’s directors, led by a government-installed chairman, Sir Adrian Montague, who insisted that the company faced insolvency if, as a result of shareholders voting against it, the restructuring failed to proceed. 

But then disaster struck. In late 2002, electricity prices started to recover, nearly doubling by 2004. Deutsche Bank forecast that the company could be almost debt-free by the end of 2004 and generate £580m of profits and £780m of cash flow in the year to 31 March 2006.

Under the restructuring, this would mean paying £500m (65% of cash flow) to the Nuclear Liabilities Fund, responsible for decommissioning. This was about ten times the amount that Sweden’s nuclear power stations were asked to pay under a carefully assessed plan.

“A STARMER-GOVERNMENT WILL BE EVEN MORE FINANCIALLY CONSTRAINED THAN TONY BLAIR’S” 

Meacher had been fired by Blair, a prime minister who was starting to have second thoughts about dismantling Britain’s nuclear power industry, but Montague was not to be deterred, threatening to get the shares delisted if shareholders dared to vote against the restructuring of a now highly solvent company. In the end, the restructuring was bulldozed through without a shareholders’ vote with the help of creditors and bondholders, for whom it was highly lucrative.

Under government control, British Energy quickly sold off its coal-fired power station, Canadian investment and other valuable assets at knock-down prices (about 18 months’ earnings for the Canadian business). Even so, France’s EDF was prepared to pay £12.5bn for the core nuclear power stations in 2008.

It wasn’t just British Energy’s shareholders who lost out. Nuclear power stations were now scheduled to be closed down gradually rather than swiftly, but there was no chance of new construction. As the industry shrank, expertise and skills were lost. The cost of new power stations such as Hinkley and Sizewell C is now considerably higher than it should be. Britain once led the world in nuclear power, but now it’s a has-been.

ONCE BITTEN, TWICE SHY

A private sector that has learned to be distrustful of government demands a higher and more certain return on investment, guaranteed by high contractual electricity prices, to get involved. Only a few overseas firms – EDF and the Chinese – are interested and it has been a painfully slow process to get started. Meanwhile, the UK must rely on expensive imported hydrocarbons.

There are other key lessons for the future. The Blair government was committed to sound finance rather than the tax-and-spend that Labour had previously been associated with. They had to satisfy their socialist cravings in other ways: by banning fox hunting, not replacing the royal yacht Britannia and by closing nuclear power. The third, like the first two, seemed to be a low-cost measure at the time but has turned out to be extremely expensive. 

A Starmer-led government will be even more financially constrained than Blair, probably forced by bond markets to impose unpopular austerity. What will it do to satisfy its inner socialist? As for nuclear energy, “there is a major role for it if it can be built on time and if it is less costly than Hinkley”, says Professor Tony Roulstone of Cambridge University. He points out that half Hinkley’s budget was spent before the first sod of earth was cut. “This requires standard, modular reactors built by the private sector.”

“We can’t take a constant supply of energy for granted,” says Chamberlain. “The conundrum of affordable energy and carbon commitments can only be solved with nuclear. We need energy that issafe, affordable, reliable and clean. There is no needto throttle our economy, worry about the weather orthe turbulence of global events. Only nuclear ticks all the boxes.”