A lack of skilled workers in the country is pushing up UK wages. The dearth of affordable housing has seen landlords put up rent by an average of 9% in a single year, weighing on inflation. New costs and controls at the border after Brexit are creating headaches for exporting companies.
This cocktail of pressures on the UK economy has prompted analysts from the Organisation for Economic Co-operation and Development (OECD) to undercut the UK’s own national forecasts for growth. By 2025, the Paris-based thinktank says, UK growth will be below that of any advanced economy in the G7.
The OECD has pencilled in a increase in gross domestic product of just 0.4% in 2024, a lower rate than any G7 member apart from Germany. By 2025, the UK slips to the back, with just 1% growth compared with an average of 1.5% in the eurozone. Up to now, the government could at least rely on Germany to own the title of sick man of Europe, after some updates to the national statistics showed the UK recovered more quickly from the pandemic and Brexit than was previously thought.
The Treasury is a little more optimistic. Its April 2024 survey of independent forecasts showed an average of 0.5% for 2024 and 1.3% for 2025.
The OECD verdict will come as a blow to Rishi Sunak and his chancellor, Jeremy Hunt, who claim the UK economy is improving, even though it slumped into a technical recession at the end of 2023. Hunt was quick to blame high interest rates for the OECD’s assessment, signposting statistics from the International Monetary Fund that showed the UK would grow faster than other advanced economies in the next six years.
But all G7 countries have grappled with higher interest rates. While persistent inflation haunts many eurozone economies, making it harder for central banks to cut the cost of borrowing, other governments have taken a different approach to stimulating economic growth, particularly when it comes to business investment.
Britain has consistently sat at the bottom of the OECD league tables for business investment. If UK business investment had matched the average of France, Germany and the US since 2008, Britain’s GDP would be nearly 4% higher today, improving wages by about £1,250 a year, analysis from the Resolution Foundation thinktank shows. The thinktank argues that rising foreign ownership of companies, alongside the lack of workers’ voices on boards, means the managers of UK companies are under less pressure to realise returns on investment when it comes. Giving workers a stake in a business creates greater engagement and personal investment in long-term profitability.
The OECD outlook serves as an opportunity for the next government to offer more than just certainty about the direction of travel. If Labour is handed a mandate in the general election, it will need to bring to an end the uncertainty around border costs hitting UK exporters, increase apprenticeships to address the skills shortage, and change planning rules to get housebuilding on target. The party has outlined some ideas, but it will have to offer more detail on the industrial strategy it has promised in order to stimulate investment. An idea to create “technical excellence colleges” to address the skills shortage was light on details of what the status would bring.
Meanwhile, the Sunak government is sticking to its mantra that the UK economy is getting stronger, despite figures suggesting it is still lagging behind. But moving back up the G7 rankings will require investment and fresh ideas.
