What has happened to Britain’s economic growth?

The Treasury’s joyful response to the news that Britain’s stagnating economy failed to grow in the latest quarter is a sign of how grim things really are, writes Sean O’Grady

Analysts say that the chancellor will have a little room for manoeuvre, but things are tight (Kirsty O’Connor/HM Treasury)

When is zero economic growth a moment for celebration? When it’s slightly better than the markets expected – and, if you’re a nervous Conservative politician, when it appears that the economy might well have escaped slipping into recession in 2023.

It is also, very marginally, good news for Rishi Sunak. The prime minister promised that one of his five priorities for 2023 was to deliver growth over the year. The fact that Britain’s stagnating economy failed to grow in the July-to-September period, and that this news was greeted with unconfined joy by the Treasury, is a sign of how grim things really are...

What did the prime minister promise on growth?

It’s very vague, but on 4 January he stated that one of his five priorities for the year ahead was thus: “We will grow the economy, creating better-paid jobs and opportunity right across the country.” He promised more investment in local areas, and argued that, “right now, the most powerful way to achieve higher growth is to make sure the UK is the most innovative economy in the world”.

Has he hit his target?

Probably, just, because it is so undemanding. The economy has grown by about 0.5 per cent so far this year, so unless there’s a calamitous Christmas season, the British economy will be a bit larger than it was at the end of 2022. However, 0.5 per cent remains miserable, even by recent standards, and very poor by comparison with what we were used to before the great financial crisis of 2008 – some 2 to 3 per cent growth per annum, and with minimal inflation. We’ll have some idea by late January 2024.

Of course, the 2023 figures may be revised up or down in the coming months and even years; and taking different bases – quarter on quarter, year on year, annualised based on one month’s or one quarter’s figures – can yield different answers to the growth question, though the general picture of stagnation with sometimes stubborn inflation is the abiding one.

The Bank of England says it will be much the same in 2025 – glacial, faltering expansion just escaping the definition of recession, ie two successive quarters of “negative growth”.

What does it mean for the autumn statement – taxes and public spending?

The analysts say that the chancellor will have a little room for manoeuvre, but things are tight. Such has been the fiscal squeeze since last year – plus private-sector wage growth matching inflation, and marginally better growth than forecast – that there is scope for modest relaxation. However, Jeremy Hunt hasn’t sounded very bullish about making generous cuts, and he is acutely conscious of the spiralling cost of servicing the national debt. Even a modest uptick in interest rates could wipe out his wiggle room.

Will there be a political growth dividend?

No. There is no discernible difference to the average family living in an economy that is growing by 0.5 per cent a year, shrinking by 0.5 per cent, or standing still. Any tax cuts or spending promises are likely to be discounted by an electorate grown used to disappointment. Interest rates will stay high, unemployment and business failures will creep up, and public services will be as stretched as ever.

Why is growth so anaemic?

Poor productivity growth. This is a long story, arguably dating back to the 1870s, but it’s a problem that has been especially serious since the end of the 2000s. The economy needs much higher levels of investment, especially private investment, and that necessarily means lower consumption. So the outlook isn’t good. More recent causes may include Brexit, the inflation spike after the Russian invasion of Ukraine, and the trend to “deglobalisation” and onshoring.

Higher interest rates aimed at getting inflation out of the system have also necessarily depressed economic activity.

Does this all mean that Liz Truss was right?

She was certainly correct in identifying that Britain’s economic problem has been low growth. The “pie”, as she used to say, needs to grow so that all of us – schools, hospitals, pensioners, working folk – can enjoy a bigger slice of a growing economy. Some of her ideas, on incentives and investment, had something to be said for them. But her experiment threatened to wreck the public finances and fuel inflation, so it had to be abandoned because it would have ended up in a slump.

In its place came an unspoken but remarkable convergence in the economic policies of both of the current front benches. Both agree on the primacy of beating inflation, strengthening the public finances and controlling debt, increasing investment and raising productivity. Neither has any quick fixes – or possibly any slow ones, either.