The prospects are bleak. For more than 70 years the British economy has grown steadily, if not always spectacularly. There have been setbacks – not least the 1970s energy shock, 1990s property crash, and 2008 financial crisis – before eventual recoveries took hold. This time is different.
Should last week’s forecasts from the Bank of England come to pass, Britain is heading for the weakest sustained period of economic growth of the postwar age, and quite possibly of the past century or more.
If the austerity-ridden 2010s were considered a lost decade, the early 2020s are expected to be far worse, with flatlining progress and heightened inequality. It could not come at a worse moment, as the country tries to recover from the Covid pandemic, meet the existential challenge of global heating, and ensure that the proceeds of growth are spread more evenly.
On the Bank’s reckoning, gross domestic product will post zero growth in 2024, with a 50-50 chance of a recession as Rishi Sunak prepares for the next general election. Growth thereafter will average less than 1% in each of the next two years, which is less than half the annual average rate between 1998 and 2007.
If the Bank is right, another of the prime minister’s five priorities – to grow the economy – is in serious jeopardy. Steering Britain to prosperity, without veering into a ditch in a reckless dash for growth like his predecessor, was the entire point of Sunak’s premiership. Instead we’re on a road to nowhere.
This week, Sunak will attempt to change course with the king’s speech on Tuesday. Last week, he hinted that his legislative focus for the next parliamentary session will be to “grow the economy, strengthen society and keep people safe”.
Yet it’s a difficult sell. No parliamentary term has been worse for living standards since the last king’s speech, seven decades ago, when George VI was on the throne.
Ahead of the state opening of parliament, business leaders are pushing for legislation to promote investment in the economy. The British Chambers of Commerce list of wants includes a “skills bill” to boost workforce training, a planning bill to ease new developments, trade policy reform to overcome Brexit headaches, and a legal framework to enable the transformation of the National Grid.
The last thing bosses want, however, is policymaking to score political goals rather than economic ones. Yet most of the ideas the government is reportedly considering seem designed to appeal to Conservative voters and save the prime minister from rebellious rightwing MPs who might otherwise depose him.
Sunak is expected to promote expansion of North Sea oil and gas exploration, as well as pro-car policies, to create a dividing line with Labour. It’s a gamble, given the failure of his Tory party conference speech to revitalise his performance in opinion polls. It is also exactly the wrong kind of change required to kickstart the economy.
The prime minister will get a reality check just days after the pomp and ceremony in Westminster, with the Office for National Statistics due to issue its first growth estimate for the third quarter on Friday. After a near-flatlining performance this year, the Bank thinks growth will have, at best, stagnated. City economists aren’t much more upbeat.
There are several reasons why Britain is trapped in a low-growth bind.
In a consumption-led economy, the worst hit to household finances in modern history – caused by a combination of the inflation shock that followed the pandemic and the war in Ukraine – was always bound to affect growth. Today, the spending power of households is depressed by not only stubborn inflation and higher interest rates but sharply rising taxes.
Over the next three years, these headwinds are expected to remain as the central bank aims to squeeze inflation out of the system by keeping borrowing costs high for an extended period of time. Much of the pain is still to come, as households prepare to refinance cheaper mortgage deals on to higher rates. Half of the impact of the Bank’s 14 rate increase has yet to be felt.
There are offsetting factors. Nominal pay growth has been stronger than expected, supporting households’ spending power, while it is hoped that inflation will cool further next year. The Bank could be wrong in its assumptions. It has been before. Yet even then, pay growth has remained significantly below inflation, and not everyone has benefited equally.
An underfunded public sector is holding the economy back, seen most visibly in record NHS waiting lists contributing to record long-term sickness among working-age adults, limiting workforce participation. Taken together with other overwhelmed services, crumbling schools and infrastructure, austerity is coming home to roost.
Following on from the King’s speech, Jeremy Hunt is expected to use the autumn statement on 22 November to bang the drum for growth by unlocking private investment, getting more people back to work, and delivering a more productive British state.
However, the chancellor is expected to steer clear of announcing transformative changes for two reasons: concerns about the health of the public finances and a desire to hold back giveaways until the spring budget, which will be closer to the election. Time for the government, though, is rapidly running out.