While the UK’s exit from recession is welcome news, structural problems will continue to stymie economic growth for years to come if they are not addressed soon, Chris Dorrell writes
The economy looks set to play a central role in this year’s general election campaign with both Labour and the Conservatives staking a claim to economic competence.
Figures out at the end of last week showed that the UK economy grew 0.6 per cent, its strongest performance in nearly three years and comfortably ahead of expectations.
The Conservatives were quick to claim credit for the surprisingly strong GDP figures, meaning the UK is officially out of recession.
“Today’s growth figures are proof that the economy is returning to full health for the first time since the pandemic,” Chancellor Jeremy Hunt said last week.
Their hope is that as the year progresses – as inflation falls further and interest rates are cut – households will slowly start to feel the benefit. Hunt has previously said that, by the autumn, people will start to experience the “feelgood factor”.
There’s no doubt that the economy is improving, but it seems unlikely that this will close the yawning chasm separating the Tories and Labour in the polls.
David Gauke, head of public policy at Macfarlanes and a former Treasury minister, agreed that last week’s figures were “encouraging.”
“The government can legitimately say we’ve turned a corner,” he told City A.M. But Gauke stressed that a stronger economy was unlikely to turn into a stronger performance at the polls.
“There’s a lag between the economy turning round and people experiencing it. People will still be feeling the cost of living crisis a few months down the line,” he said.
This point was echoed in Rachel Reeves’ speech last week, where she accused the Tories of “gaslighting” the public over the state of the economy.
It’s not difficult to see why voters won’t be thanking the Tories for their economic management just yet. Last week’s GDP figures showed that GDP per head was still 0.7 per cent lower than last year.
Indeed, living standards in the 2022-23 financial year dropped at their fastest pace since records began. The OBR forecast that household disposable income won’t recover to its pre-pandemic peak until 2025-26.
Obviously the Tories can’t be held responsible for all, or even most, of the wider macroeconomic environment over the past few years created by the Covid-19 pandemic, but the fact remains that people will feel poorer at the end of this parliament than they did at the beginning.
This is not a happy set of circumstances for a government seeking re-election.
But Hunt’s comments about the ‘full health’ of the economy raise a deeper problem.
There’s no doubt that since the pandemic the UK has underperformed.
Now it finally looks as if the UK might be approaching something like its potential growth rate, the rate at which an economy can grow without causing inflation. New forecasts from the National Institute of Economic and Social Research (NIESR) suggest that the UK’s trend rate of growth is around 1.0 per cent. The OBR is a bit more optimistic, putting it at 1.6 per cent.
But if you think those figures sound a little disappointing, then you’d be right. Pre-financial crisis the UK’s trend rate of growth was around two per cent.
Escaping last year’s shallow recession was undoubtedly good news, but Reeves is right that it is not cause for a “victory lap”.
The real challenge for the next Chancellor, whoever she may be, is to improve the UK’s trend rate of growth. This will involve tackling the deep structural issues facing the economy, such as stagnant productivity growth, low levels of investment and the onerous planning system.
Between now and the election it would be helpful to get some more concrete proposals on how either party would actually go about this.