Economics & Growth | Monetary Policy & Inflation | UK
While most are focused on UK data in the short-term to gauge whether the Bank of England will cut rates next week, we shouldn’t lose sight of some larger trends affecting the country. Here are four to keep an eye on:
1) UK Productivity is Weak, Weak, Weak
We all know UK productivity is weak. But few of us appreciate how bad the picture is. Looking back over the past century or two, we can see that UK productivity growth has returned to where it was in the late 1800s (if we exclude the two world wars, Chart 1). This chronic weakness (observable since the financial crisis) is something Andy Haldane, Chief Economist of the Bank of England, considers to be much worse than even what is expected in hard Brexit scenarios.
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While most are focused on UK data in the short-term to gauge whether the Bank of England will cut rates next week, we shouldn’t lose sight of some larger trends affecting the country. Here are four to keep an eye on:
1) UK Productivity is Weak, Weak, Weak
We all know UK productivity is weak. But few of us appreciate how bad the picture is. Looking back over the past century or two, we can see that UK productivity growth has returned to where it was in the late 1800s (if we exclude the two world wars, Chart 1). This chronic weakness (observable since the financial crisis) is something Andy Haldane, Chief Economist of the Bank of England, considers to be much worse than even what is expected in hard Brexit scenarios.
Admittedly, there are global forces acting to lower productivity – the scars of the financial crisis, low rates keeping zombie companies alive, the rise of the digital economy, and troubling demographics. But the UK has fared worse than its peers on most productivity metrics.
While there are numerous explanations as to why the UK has lagged, much has to do with its the two-speed economy. The UK contains world-class and highly innovate firms but also a long tail of low productivity and inefficient firms. And the financial crisis and technological advances have only exacerbated these issues. If there is one economy that needs a reboot, it’s the UK.
Chart 1: UK Productivity Weakest Since 1800s (Outside of World Wars)
Source: Macro Hive, Bank of England
2) The UK Economy is Falling Down the Global Economic Ranking
Perhaps partly due to this poor productivity, but also the rise of emerging markets, the relative size of the UK economy is shrinking. Today, in current dollar terms, the UK is ranked at #7 in size of economy. That’s behind France, Germany, and India (Chart 2). When we adjust using PPP values to get a better sense of the size of the real economy (rather than the market value), the UK falls a few notches farther to #9, with Russia, Indonesia, and Brazil ahead. The UK just isn’t as big as used to be, and this will likely feature in the minds of global economic powers.
Chart 2: Ranking of Economies by Size
Source: Macro Hive, IMF
3) Something is Up With UK Trade With Non-EU Countries
You would have thought that the biggest casualty of the Brexit vote in 2016 would have been UK trade with the EU. But the trade balance with the EU has actually improved, while the trade with non-EU countries has worsened. Could this suggest that a large portion of UK exports to the world is linked to its membership of the EU?
Chart 3: UK Trade Balance: Since 2016, Improved vs EU but Worsened vs Non-EU
Source: Macro Hive, ONS
4) UK Can Deliver Inflation
The one thing the UK has done better than most European countries is delivering inflation. Over the past ten years it has averaged 2.1%, and so the Bank of England is one of the few central banks to have achieved its 2% target. Meanwhile, France and Germany have struggled to keep it above 1%, while Italy and Spain struggle to keep it above 0.5%. So despite the UK’s productivity and trade challenges, it can deliver inflation.
Chart 4: Average Inflation Over Last Ten Years in DM
Source: Macro Hive, National Stats Offices, IMF
Taking all these factors together suggests the UK has already experienced the hard Brexit shock that many have been forecasting for the future. The silver lining, then, is the UK starting at a very low base. So could it get any worse?
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)