Why is the UK Economy Sinking While the EU Swims?

It's safe to say economies worldwide are struggling with soaring inflation, increasing debt burdens, geopolitical tensions and economic slowdowns. Some countries are bracing for an inevitable recession – the UK narrowly avoided one at the tail end of 2022. EU nations will be no exception to an upcoming recession, though the extent of the downturn coming the UK’s way will differ.

Goldman Sachs expects the UK’s growth for 2023 (-1.2%) as just ahead of Russia (-1.3%), a country currently at war with Ukraine and pummeled by western sanctions for most of 2022.

It’s easy to take a similar stance to our politicians and state that our troubles are due to external shocks out of our control, but this is not the case. Current economic hardships have brought to light the deep-seated issues surrounding the UK economy.

Without them, the economy would still be underperforming, but the UK’s problems have created a triple whammy of dilemmas: an energy shock as bad as Europe’s, an inflation problem on par with the US and a uniquely British shortage of labour.

Sour relations sour trade

With Brexit came severe labour shortages, higher raw material prices, greater regulatory costs and a big “I told you so” from member nations. The UK’s loss of access to the European Single Market and the Customs Union has disrupted UK trade. Brexit is responsible for the UK’s subdued recovery from the pandemic.

Data from the World Bank shows that trade intensity in the UK remained depressed following 2020, while the EU recorded a strong rebound.

The EU-UK trade agreement has allowed tariff-free trade and quote-free access to each other’s markets for goods. Even so, work still needs to be done regarding regulatory divergence to make the UK a more desirable trading partner for countries outside the EU.

Poor investment activity hinders recovery

Brexit can be blamed for sinking UK productivity, as businesses have delayed investments, braced for uncertainty. Poor investment activity is set to contribute to a painful recession and an equally poor recovery compared with that of the EU.

According to a Bank of England study, Brexit cut the productivity of UK companies by between 2% and 5% over the three years following the EU referendum.

Although it may be satisfying to point our fingers at Leave voters, this Brexit-induced productivity slump is a short-term issue and will eventually phase out. The real problem lies with the insufficient investments of the UK government and private companies.

Although the government accounts for a much smaller percentage of investment activity than its private-sector counterparts, it plays a vital role in creating the foundations that make investing a worthwhile strategy for businesses.

This begins with reassuring companies that the economy will become strong. The UK government has unfortunately struggled with this, especially recently, following Liz Truss’ impressive mishandling of the mini-budget and Jeremy Hunt’s failure to provide businesses with a long-term economic plan.

The skills shortage strangling UK productivity

The UK is struggling with a growing labour shortage thanks to a deadly cocktail of older people retiring, more young people in further education and fewer migrants in the labour market. This coincides with a widening gap between the skills required in advertised jobs and the skills of the current workforce.

The ONS found that the number of job vacancies reached a record high of 1.3 million during the three months through May 2022, up 20,000 on the previous quarter.

This skills shortage shows no signs of letting up. Although many people welcomed the growing digital transformation of businesses during the COVID-19 pandemic, the UK labour force simply can’t meet demand.

AND Digital’s Nature of the UK’s Digital Skills Gap report showed that 81% of UK managing directors say a lack of digital skills is hurting their business.