Economists warn 1% growth could become the UK’s new norm

Posted at September 10, 2013 | Categories : News

The Institute of Economic Affairs (IEA) is warning that the long-term, sustainable growth rate in the UK may be only 1% (compared with the 2.5% that HM Treasury thought standard from the 1980s to the 2000s).

Until 2008 the UK economy doubled in size every 25 years and the IEA argues that unless action is taken it will now only double in size every 70 years.

GDP dropped 6.3% from its peak in 2008 and is still around 3% lower than that today, with average annual output growth from 2008 of -0.7% – on this basis the UK is experiencing the worst and slowest recovery from a major economic shock in 170 years.

The research, entitled Will flat-lining become normal?, claims that the poor recovery is due to a major productivity crisis and identifies seven key reasons to be pessimistic about the UK’s growth rate over the long-term, in brief as follows:

·         Increased government spending and taxation as a proportion of GDP. This factor alone has reduced the sustainable growth rate by around 0.5% – possibly more.

·         Increased regulation of the energy and financial services sectors. These sectors contributed substantially to the productivity performance of the economy in earlier decades.

·         The depletion of North Sea oil.

·         The arithmetical effect of low-productivity immigrant workers being added to the working population but please note the section of the paper regarding productivity of immigrant workers does not conclude that immigration should be reduced; it simply assesses the impact on productivity and shows the arithmetic consequence of much of the UK’s immigrant labour being relatively unskilled.

·         The huge growth in credit before the crisis, followed by its contraction since – partly driven by increased banking regulation.

·         Increased government, corporate and household debt relative to GDP.

·         Demographic pressures from an ageing population.

According to the IEA, if we want to get back to sustainable growth rates of around 2% or more over the long-run, bold reforms will be needed including: the rolling back of government activity and influence; the regeneration of affordable credit channels to unencumbered households and businesses; and the implementation of radical supply-side measures.