Britain nears bottom of the heap for economic growth potential: Economist

Britain’s growth potential has fallen behind every large economy except Mexico due to collapsing productivity and severe labor market shortages, according to former Bank of England rate-setter Michael Saunders.

Saunders, who finished his term at the UK central bank in August and is now senior economic adviser at Oxford Economics, said his analysis of 43 country forecasts by the Organization for Economic Cooperation and Development showed the UK’s economic “speed limit” will be the second lowest in the group for the period from 2020 to 2024.

Potential output, a mixture of productivity and workforce growth, is a measure of how fast an economy can expand before generating inflation. The findings suggest little hope that Prime Minister Rishi Sunak’s government can escape economic stagnation and inflation that are delivering the sharpest squeeze on consumers in memory.

“Low potential growth implies low growth in real living standards,” Saunders wrote in a note. “It also implies a sluggish trend in growth of tax revenues and meager growth in real public spending per head or a rising tax burden.”

Saunders said the UK will manage an expansion of only 0.5% annually over the four years to 2024. On a per person basis, the Bank of England’s recent forecasts suggest potential output will not grow at all between 2019 and 2025, he added.

The dismal picture helps explain why the UK faces a sharp squeeze on household incomes and the highest sustained tax burden since the Second World War. 

Britain was “roughly in the middle of the pack” of the 43 OECD nations for potential growth between 2010 and 2019, Saunders said. But a steep decline in labor market participation since the pandemic has hit the UK hard. Alongside persistently weak productivity, the workforce is now shrinking as older workers retire early and others drop out with long term illness.

The UK workforce is 1% smaller than at the end of 2019 and 3% smaller than it would have been on past trends, the worst collapse in participation of any leading economy. Saunders warned the picture may not improve.

“Unless offset by persistently high inward migration, adverse demographics driven by population aging are likely to further limit workforce growth in the coming years,” he said.

“Even with a pickup in the next two years, we expect UK workforce growth will slow from an average of 0.8% year on year during 2010-2019 to around zero year-on-year on average in 2020-2024, among the lowest of any industrial country and well below workforce growth in the US and Euro Area.”

To help tackle the problem, he called for measures to address the rise in long-term sickness through cutting NHS waiting lists, which have risen above 5 million.