As expected, headline inflation eased again in July, with the rate of price rises now 6.8 per cent. That followed on the heels of a gross domestic product (GDP) surprise to the upside – the economy grew by 0.5 per cent in June, and by 0.2 per cent over the second quarter.
It’s too soon to get the champagne out. Core inflation has not budged, the Bank of England (BoE) has a battle on its hands with record growth in wage levels, and the truth is there’s not much difference between recession and expansion of 0.2 per cent, so as things stand it’s unrealistic to assume that growth will now stop being elusive.
The question to focus on, however, is not what level of output might emerge soon, or even if it will. It’s what happens when inflation is tamed and more clement conditions return.
Britain’s real problem is that the growth trend has been heading in the wrong direction for years. Once upon a time, the economy grew steadily at a rate of 2.5 per cent, and often closer to 3 per cent, a year. But that all stopped when the financial crisis erupted. If we’re lucky, the economy might expand by 1.75 per cent in a few years’ time. The BoE’s expectation is for GDP growth of 1 per cent in 2026.
Weak GDP growth afflicts the EU, too. A recent paper from the European Centre for International Political Economy points out that the long-term average growth rate across European economies has been closer to 1 per cent than the ideal of 3 per cent (the magic rate that means an economy could double in size in 24 years), and that while France and Germany were as rich as the 36th and 31st richest US states in 2000, now they are only as rich as the 48th and 38th.
Growth matters – it brings higher wages and prosperity, and drives up living standards. Why is it so difficult to maintain and why has growth been consistently higher in the US? Drivers of America’s success include greater levels of technological change, higher R&D spending, and faster growth in labour productivity – plus the longer hours worked by Americans.
On that last point, it should be noted that not everyone approves of ‘growth’ especially if it threatens the work-life balance we enjoy and the environment. But Robert Colvile at the Centre for Policy Studies is concerned that the belief that growth is bad and damaging is seeping into political and business thinking, and is part of the reason why the growth ceiling of the UK economy has been getting lower for decades.
Growth is not just economically necessary, he says – without it, societies become ‘politically far more fragile’, especially as younger people lose hope of achieving prosperity.
How then do we drive growth?
Education, training, investment, workforce expansion and, crucially, productivity gains are part of the equation. John Mills, founder of the Institute for Prosperity and non-listed manufacturer JML, believes supporting the manufacturing sector could accelerate GDP growth. He argues it is difficult to increase productivity in services, and supply-side remedies such as infrastructure can only achieve so much in the absence of export-led growth. Mills would like to see efforts focused on lowering the exchange rate to make exports competitive.
The exchange rate isn’t the only barrier to export growth. In a survey of businesses by the Department of Business and Trade, knowledge gaps, time and cost were all proffered as export impediments. Another is declining perceptions of demand for UK products and services. In 2022, half of the businesses surveyed (up from 39 per cent in 2021) agreed that since the UK left the EU, there has been less demand for UK products and services.
Britain’s economy has not returned to its pre-pandemic size, and finds itself squashed in between the ambitions and deep pockets of the US and the EU, who are spending respectively $50bn and €45bn on their technology expansion strategies. Both are helping semiconductor company TSMC to open factories in their respective territories to secure future supplies, and because they want this tech expertise.
Services-focused Britain missed the semiconductor boat a long time ago. The government has admitted as much, declaring that it was “not going to recreate Taiwan in south Wales”. The EU on the other hand hopes to be manufacturing 20 per cent of the world’s chips by the end of this decade. But if we have opted out of the semiconductor manufacturing race, the government has at least been fighting hard to secure the Tata battery gigafactory.
Whatever the role of manufacturing and exports, a big plan is needed to fire up productivity and economic growth. The chancellor has promised one for later this year. What's required may be total reinvention. That's a strategy that's been embraced at corporate level to great benefit by one of our buy ideas this week – Roper Technologies – and some of the survivor shares named in this week's main feature.
