#TradeTuesday: How can the UK once again create wealth?

Perhaps in contention for the most used phrase of 2023 is “the UK will avoid a recession”.

This could be seen as quite the success and a significant upgrade from just a few months ago when the UK economy was expected to record a 0.7 per cent decline. Instead, the output is now expected to rise by 1.9 per cent next year, and 2.3 per cent in 2025.

Nevertheless, the long-term trajectory for the UK economy is still doom and gloom. For this week’s #Trade Tuesday, George Esmond has analysed the UK’s trade potential by using technology to enhance the relationship between the Government and the markets drawing on his recent read “Windows of Opportunity” by former Labour Minister Lord David Sainsbury.

Britain has been plagued by anaemic productivity growth since the financial crisis. Between 1974 and 2008, the UK’s productivity grew at an average rate of 2.3 per cent per year, a much higher rate than the growth rate between 2008 and 2020 at around 0.5 per cent. This is a substantial slowdown, unparalleled in the period of the country’s economic history.

This year, the British economy will suffer the worst fall in living standards on record and will be the worst-performing of the G20 economies. Britain’s goods exports are the worst in the G7, while foreign investment has fallen considerably since 2016. Productivity growth has been poor in most advanced economies since the global financial crisis. However, the UK economy has underperformed most comparable economies after 2008, which is what makes the EY 2.3 per cent prediction hard to believe.

The UK’s productivity between 2008 and 2019 is considerably lower than the higher rates of one per cent in the United States and 0.7 per cent in France and Germany. While long-term low productivity growth is not a UK-specific problem, it is a worse in the UK than in most comparable advanced economies.

The Financial Times economist, Martin Wolf, says, “It is hard to believe that the UK will thrive as a peaceful and orderly democratic society without faster economic growth”. To bring that about, he believes the country will need to “raise its dreadfully low national rates of savings and investment, build far more houses, and reform its pension system to generate more risk-taking capital, create dynamic new businesses, discover a route towards better opportunities for trade in its European neighbourhood, offer high-quality jobs to its people and fund the education and training they desire”.

An ambitious list to say the least; this can only be successful if all this is done,  and if we could afford the public services needed to address a growing ageing population’s needs.

Wolf’s comments seem to diagnose the issues that need to be resolved. However, the question on everyone’s lips is how to achieve this.

In his book, Windows of Opportunity, the former Labour Minister Lord David Sainsbury says the engine of economic growth is innovation, both through technological advancement and new business practices and processes. Innovation drives up the level of value-added output per capita in the workforce,  improving wages and the standard of living.

This success could be down to a clear public-private partnership. Entrepreneurs must take the lead, but Government help is required. However, not by directing a company’s strategy, but by helping it to develop the capabilities it will need to succeed.

Innovation requires many inputs that are the responsibility of policymakers, including investment in the kind of technologies that might be too risky for individual companies to bear. In his book, Sainsbury cites three examples of such success stories: the Taiwanese electronics industry, DRAM chips in South Korea and the world wine industry, where new production techniques and changed industry structures to provide great windows of opportunity for winemakers first in the US and Australia, and then in less developed countries.

In Sainsbury’s view, the UK’s loss of competitive advantage in the world has not been the result of market failures or too much government oversight. Rather, it is down to weaknesses and flip-flopping in three areas influenced by government policy: education and training, innovation systems, and an approach to corporate finance that has discouraged technological and organisational progress. Subsequently, there has been a steep decline in key sectors such as the manufacturing industry, especially given its potential contribution to high-value exports and productivity growth.

Therefore, he argues Governments should not support individual companies or try to take entrepreneurial decisions. But they need to take a long-term view and have a shared understanding with the industry on the source of competitive advantage. The Prime Minister’s five pledges set out earlier this year make political sense with the election 18 months out, but it takes the UK Government from a position of quickly atrophying to treading water. What Lord Sainsbury calls for is a period of consistency. A consistent approach in policy to technical education and training. A consistent approach to regional policy has so far failed to create a structure to which relevant powers of the central government could sensibly be devolved.

Furthermore, UK governments have long struggled to implement effective cross-departmental working, but need to quickly understand how they can utilise new technologies like AI for consistent cross-departmental effective delivery, work more effectively with industry, and ensure they are taking advantage of the next generation of emerging opportunities.

These opportunities would not only deliver domestic growth but also fuel trading relationships and export potential.