ECONOMY & POLITICS
New PM as economy falters
Change at the top, but same long ‘to do’ list
Boris Johnson has just entered Downing Street as the UK’s third Prime Minister in three years, but perhaps the first to find his inbox quite so overflowing with such highly urgent tasks.
There’s the none-too-small matter of Brexit to deal with, and an imminent deadline by which he has committed to take the UK out of the European Union, deal or no deal.
The Brexit saga has been taking its toll on the country’s economy, which is also feeling the strain of a series of other challenges – some related, others not.
Business investment declined every quarter of 2018, though rebounded slightly in early 2019, thought to be as a result of companies being unable to delay any further in carrying out necessary upgrades rather than any real restoration of confidence.
April this year saw the biggest fall in monthly GDP since 2016, with manufacturing output down and car production in particular plummeting. Construction and services also fell. The Office of National Statistics attributed the decline to uncertainty around the UK’s original EU departure date, of March 29.
The consensus is that things will get worse before they get better.
The IMF forecasts that in the event of a no-deal Brexit, the UK economy will shrink by 2.1 percent, with recovery only achieved by 2024. Public finances would be hit hard, along with households.
The UK’s Office of Budget Responsibility (OBR) predicts that under a no-deal Brexit, sterling would lose 10 percent of its value against other major currencies, unemployment would leap from its current 3.8 percent (the lowest rate since 1974) to 5 percent. In addition to these dire forecasts, the OBR also warns real wage growth would suffer as higher inflation took hold.
The independent National Institute of Economic and Social Research predicts that even in the event of an orderly exit from the EU, the economy will remain sluggish this year and next, before beginning a growth curve again in 2021.
On top of all this, UK productivity remains a core challenge for the UK government, whatever its political colour. The country’s slowing productivity growth rate has been a problem for years, but since the 2008-09 recession, the productivity slump in the UK has been more pronounced than in any other leading western economy. Output per hours worked have now slipped to around 15 percent lower than the average for other G7 countries.
In the 1960s, the UK was a productivity leader in Europe, but now is so far behind that the average French worker has achieved more by the end of Thursday than their British counterpart does at the end of a full week. And this matters, because increased productivity is how workers can earn more without driving up inflation and also how governments can draw more tax revenue without having to raise tax rates. In short, better productivity is the way nations get richer and their people’s standard of living improves.
Most worrying for the UK, perhaps, is that productivity rates are unlikely to dramatically improve in the short term, because OECD figures show that the country has one of the largest proportions of low-skilled young workers among advanced economies.
So, the young are a problem, but so are the elderly. As the UK population ages, the country’s tax base is shrinking in comparison, and yet the bill for health and adult social care is rising. National data shows that the cost to the state of someone aged between 25 and about 65 is fairly static, at £10,000 a year; while an 80 year old costs in the region of £30,000, and those who reach a century require services costing about £45,000 a year.
And then there’s climate change. The Office for Budget Responsibility says that if Paris Agreement targets are met and world temperatures stabilise, the effect on the economy will be small. But, it warns, failure to meet targets will lead to major weather events and mass migration, and could have a significant negative impact on the UK economy.
The gradual switch to a lower-carbon economy also involves risk, in large part because the nation’s tax income is heavily reliant on the financial services sector, which is highly exposed to businesses in traditional energy sectors such as oil.
With all this going on in the background, it’s hardly a surprise that consumer sentiment has taken a battering.
All measures on the national index of consumer confidence declined in June, with global growth concerns and uncertainty over domestic policy weighing heavily on people’s expectations and plans. People are still delaying major purchases and feel negatively about the likely state of their personal finances over the next 12 months.
As a result, retail sales contracted for a third month running in July – the longest period of decline since 2011.
Yet as he took office, Prime Minister Johnson exuded optimism, and not just about his mission to deliver Brexit. He promised improvements to national healthcare, better transport, infrastructure and education.
“And to all those who continue to prophesise disaster, I say yes there will be difficulties although I believe with energy and application they will be far less serious than some have claimed,” he said.
“The doubters, the doomsters, the gloomsters, they are going to get it wrong again.”
Amid all the challenges his administration faces, and all to be delivered with a parliamentary working majority of just two, the new PM’s task is formidable indeed.