British Economy Monitor #008
GDP slowdown, business lobbying, family business slowdown
The Morning Take
Patch and mend is not going to work
The UK economy unexpectedly contracted (£) by 0.1% in September and growth in August was revised down to 0%. The Bank of England, for example, estimated that growth would be 0.3% in September this year, so this is going to have caught many people off guard.
The UK is not in a recession or even necessarily heading for a recession, however, the GDP slowdown has been clear for some time. One-off events like the JLR shut down due to the cyber attack will be cited. However, the decline in UK production (e.g. manufacturing, electricity, chemicals etc.) has been marked for some time. Construction and services may came to the rescue, but if growth is limited to what we are selling or buying to ourselves, we are not going to see boom-time anytime soon.
Governments need to stop focusing on quarter to quarter figures and start thinking longer term. It might actually help them politically given that sluggish growth appears likely for some time anyway. Why?
There is a slowdown in global service trade growth. From 2005 to 2014, global service exports were growing at 7.8% per year. In the years 2015 to 2024 this has slowed to 6.6%. This matters for us because our exports are heavily weighted towards services. The composition is also changing. Financial services are no longer the dominant global service export. The UK is still second in the world for financial service exports, however for telecommunications, computer and information services (digital) we are fifth. Germany and the Netherlands are also not that far behind us on digital exports, there is a scenario in which one or both take over us in the near future.
We are also fishing in a much smaller pond. The global trade in goods has grown by $14 trillion since 2005, nearly three times as much as the global trade in services which has grown by $4.7 trillion.
If the UK had maintained its market share in global goods exports since 2005 (3.2% in 2005 v 2% today) it would be worth over $200bn in additional exports in 2024.
In cash terms in 2024, the economy would be around £235bn bigger than it is today and the Chancellor would have around £80bn in additional tax revenues (that black hole starts to seem quite small!). This is worth around £4,000 per person.
Adding up the numbers is the easy part, but making the transition over to the alternative is the challenge. This will require significant public investment into rebuilding our productive capacity (cheap capital, lots of energy production, skills and training subsidies etc.).
However, it would be worthwhile. Again, since 2005, the UK would have had an additional $1.4 trillion in additional goods exports if it had maintained its market share. Even growing our export market share a bit would unlock hundreds of billions of exports over the next few decades, income we sorely need.
The problem for the government is that it has not made any arguments of this kind and so when it is asking for patience, patience for what? What is the new model that we are moving towards?
I have confidence that the public would understand and accept these arguments if they were made to them, but surely a year into office the myth that the previous government were simply ‘bad administrators’ has to be dead. The question is what is next?
It’s all connected!
An easy one today, as the Prime Minister and Chancellor were apparently wooing ‘top bosses’ (Times / £) at a Downing Street reception last night. This is pretty standard stuff, but the composition of the firms speaks a lot to the issues laid out above. Financial services, house builders, retail etc. I haven’t seen a full list, but I doubt that there were many production based firms on it.
The problem with the decline of British industrial output is that the firms that champion this work are declining. So there are fewer of them and their voice counts for less. For example, Make UK, the membership body for manufacturing, does not appear to be anywhere as influential as it used to be in politics or the media. So we have a self-fulfilling cycle where the dominant firms (which have dominated in a declining economic model) keep lobbying for more of the same, and the politicians who want to be seen to be ‘listening to business’ agree with them. This compounds the problems highlighted above and leads to ineffective policies.
The decline of economic literacy amongst our political elite and policy makers has been very damaging. They lack confidence in their own analysis and so are forced to rely on the status quo. Ultimately, the skill of economic management and reform is to see beyond the status quo and look at wider trends. Thatcher, Lawson and Howe, to give them credit, were able to do this. They did not foresee the unintended consequences of their actions, but they had the courage to make a transition. Where are the leaders of the new economy today?
Morning Must Read
An excellent piece by the ever-correct, Juliet Samuels, on the impact that inheritance tax changes have had on investments by family firms (Times / £).
This chimes with something I wrote for UnHerd (shameless plug!) recently on family businesses, where we seem to have lost 60,000 family businesses in the past few years.
Do read both if you can!