Prospects for UK Economic Growth

Question 1: How do you see prospects for future (per capita) GDP growth in the UK in the next decade?

Question 2: What is the most important contribution economic policymakers can make growth in the UK over the next decade? 

Summary

The CfM-CEPR panel of experts on the UK economy is nearly unanimous that UK income growth will be low in the upcoming decade. The majority believe that this will be due to structural factors. The most effective policies to improve UK economic performance are raising public investment and improving trade relations with the EU and other trading partners, according to the panel.

Background

The May 2022 CfM survey asked the members of its UK panel to forecast the prospects for UK economic growth and propose policies that might improve the UK’s economic performance in the upcoming decade.

Disappointing economic performance in the UK

In the 15 years following the global financial crisis, UK growth fell to its lowest rate since the Great Depression. This was part of a broader decline in growth rates and interest rates in high income countries. Before the pandemic, there were concerns in several countries of a ‘secular stagnation’ trap, an idea revived by Larry Summers (see Summer 2014).

Even before the UK economy recovered to its pre-pandemic level, the Russia’s invasion of Ukraine has introduced new headwinds to UK economic growth. The conflict has led to increases in energy and other commodity prices and threatens to fragment global supply chains. This risks additional constraints on global potential growth that may well be persistent. 

The causes of low growth prior to the pandemic were hotly contested and it is still unclear how Covid and geopolitics will have exacerbated or mitigated the pre-Covid trends. Several studies have emphasised the longer-term structural drivers of weak growth. Gordon (2016) has argued that the pace of innovation at the frontier has been declining in the post-war period, and Bloom et al (2020) provide evidence that the flow of new ideas has slowed significantly in recent years. There is empirical support for this idea, for example from Fernald (2016) who finds that growth at the (US) frontier slowed prior to the financial crisis. Fernald & Inklaar (2022) extend this work to a UK context.

Other researchers have emphasised that importance of the financial crisis in driving slower growth through prolonged weakness in demand. Blanchard and Summers (1986) argued that persistently elevated unemployment rates in the 1980s were due to “hysteresis”, whereby high unemployment leads to scarring effects and longer-term unemployment. Cerra et al (2022) review the literature on hysteresis and related it to the global financial crisis. Recent research, including Fornaro & Benigno (2018), have emphasised the possibility of Keynesian ‘stagnation traps’ in which pessimistic expectations become self-fulfilling. A common thread in this work is growing evidence that challenges the assumption that macroeconomic policy only has a temporary impact on size of the economy. Ilzetzki (2022) gives evidence from World War II of the inverse phenomenon, whereby a high-pressure economy leads to higher productivity growth.

In a recent important contribution, Philipon (2022) argues that disappointing growth rates reflect unrealistic expectations rather than poor economic performance. He shows that total factor productivity (TPF) grows linearly, not exponentially, as previous research had asserted. Evaluated in this light, productivity growth rates can be expected to decline over time, as the level of TFP increments by constant amounts.    

There are also more optimistic views on post-pandemic growth. For those who thought the original slowing was a structural phenomenon, the pandemic has spurred adoption of new technologies and working practices (see, for example, Valero et al., 2021). For those favouring more demand-side explanations, the aggressive response to the pandemic at home and abroad provides reason for thinking that economies may break away decisively from the low growth and low inflation of recent years.

While there is obvious uncertainty about the outlook, policy makers looking to drive a rapid recovery from the pandemic must confront this uncertainty and decide how best to raise living standards in the years ahead.

Question 1: How do you see prospects for future (per capita) GDP growth in the UK in the next decade?

Twenty-five members of the panel answered this question. There is near unanimity (80% of the panel) that the UK will experience low growth over the upcoming decade. A majority of all respondents (56%) think this will be due to UK-specific structural challenges, while 20% believe that this will be because the world economy will underperform; a single respondent (representing 4% of the panel) thinks this will be due to weak demand. In contrast, 12% of the panel thinks the UK economy will experience high growth due to structural factors. Not a single panellist believes the economy would perform well due to strong demand.

The main local structural factors that will be a drag on the UK economic economy include Brexit and low levels of investment (both cited by several panellists). Richard Portes (London Business School and CEPR) adds an underperforming education system to the list and “impediments to research (e.g. destruction of research collaboration through EU Horizon programme and government indifference to science)”. Roger Farmer (University of Warwick) cites the green energy transition and an aging population as additional factors.

Michael Wickens (Cardiff Business School and University of York) predicts low growth due to global factors, but emphasizes that domestic (monetary) policy might affect how badly the UK is affected: “The experience of the 1970's shows that it is better to take a short-term hit to growth to control inflation than to try to sustain demand in the face of a big supply shock. This is a lesson that seems to have been forgotten.”

James Smith (Resolution Foundation) is more concerned about weak demand in the medium term: “My worry in this context would be that the pandemic leaves us with lasting demand headwinds in the medium term (e.g. through planned tax rises or a deterioration in the terms of trade).”

Patrick Minford (Cardiff Business School) dissents from the majority view and believes that Brexit will be a boon for, rather than a drag on, economic growth: “The UK is moving into a new policy environment where it can regulate for innovation rather than for EU-style risk-avoidance. It is also able to open up the economy to world competition via new free trade agreements with the non-EU world.”

Question 2: What is the most important contribution economic policymakers can make growth in the UK over the next decade?

Twenty-seven panellists responded to this question. 30% of the panel advocated for increased public investment and an additional 30% called for better trade relations with the EU or other countries. Less than 10% of the panel cited one of the following policies: repairing public finances, ensuring high levels of aggregate demand, or lowering inequality, as the best way to promote economic growth in the UK. It should be mentioned that most panellists believe that several, even all, these policy measures could and should be used to improve the UK’s economic performance.

This survey will provide context to the Economy 2030 Inquiry, a collaboration between the Resolution Foundation (RF) and the Centre for Economic Performance (CEP) at the London School of Economics (LSE), and funded by the Nuffield Foundation, aims to address the question of how the policy makers can successfully navigate the decade ahead.

References

T Bell, S Dhingra, S Machin, C McCurdy, H Overman, G Thwaites, D Tomlinson & A Valero, The UK's decisive decade: The launch report for The Economy 2030 Inquiry, Resolution Foundation & Centre for Economic Performance, May 2021.

O J Blanchard & L H Summers, Hysteresis and the European Unemployment Problem, NBER Macroeconomics Annual, Volume 1, pages 15–90, 1986.

N Bloom, C I Jones, J Van Reenen & Michael Webb, ‘Are Ideas Getting Harder to Find?’, American Economic Review, vol. 110, pages 1104-1144, April 2020.

V Cerra, A Fatás & Sweta & S C Saxena, ‘Hysteresis and Business Cycles’, Journal of Economic Literature, 2022, forthcoming.

L Fornaro & G Benigno, Stagnation Traps, Review of Economic Studies, Vol. 85, pages 1425-1470, July, 2018.

J G Fernald, Reassessing Longer-Run U.S. Growth: How Low?, Working Paper Series 2016-18, Federal Reserve Bank of San Francisco.

J G Fernald & R Inklaar, The UK Productivity “Puzzle” in an International Comparative Perspective, The Productivity Institute, Working Paper No. 020, 2022.

R J Gordon, The Rise and Fall of American Growth: The US Standard of Living Since the Civil War, Princeton University Press, 2016.

E Ilzetzki, Learning by necessity: Government demand, capacity constraints, and productivity growth, LSE, March 2022.

Philipon, Thomas, “Additive Growth,” NBER working paper, 29950, April 2022.

A Valero, C Riom & J Oliveira-Cunha, The business response to Covid-19 one year on: findings from the second wave of the CEP-CBI survey on technology adoption, CEP Covid Analysis Series, No. 24, November 2021.

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How the experts responded

Question 1

Participant Answer Confidence level Comment
Jumana Saleheen's picture Jumana Saleheen Vanguard Asset Management Other or don’t know Confident
I expect moderate annual growth over the next decade. Growth over the next decade will be similar to growth over the past decade, averaging around 2% per year.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Low growth because of UK-specific structural challenges Very confident
The UK has not prepared the conditions for a sustained improvement in productivity with shortages in investment, skills, infrastructure and domestic finance. Brexit has also not yet delivered the improved trading prospects with the rest of world and seems unlikely to be able to do so in the immediate future.
David Cobham's picture David Cobham Heriot Watt University Low growth because of worldwide structural challenges Confident
But there are also problems from UK-specific structural challenges, which will worsen the UK's relative position.
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme and University Superannuation Scheme Other or don’t know Not confident
Not sure what high or low growth is. I expect about 2% GDP and 1.5% per capita. Would call this 'moderate'.
Martin Ellison's picture Martin Ellison University of Oxford Low growth because of UK-specific structural challenges Confident
It is going to take the UK considerable time to adjust to new trading arrangements. Working through Brexit and the challenges it poses to the UK in particular will impede growth, at least over the next decade or two. With the global background also gloomy, it is difficult to be positive about UK's future.
Michael McMahon's picture Michael McMahon University of Oxford Low growth because of UK-specific structural challenges Confident
I also see some worldwide factors, but I think the UK specific ones dominate.
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Low growth because of worldwide structural challenges Confident
Patrick Minford's picture Patrick Minford Cardiff Business School High growth because of structural factors Confident
The UK is moving into a new policy environment where it can regulate for innovation rather than for EU-style risk-avoidance. It is also able to open up the economy to world competition via new free trade agreements with the non-EU world. This change is hard to evaluate but should promote higher growth over the long term. Much recent comment has highlighted the disruption due to the end of the close EU relationships. But long term growth will depend on these new developments.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Low growth because of UK-specific structural challenges Confident
James Smith's picture James Smith Head of Macroeconomic Policy, Resolution Foundation Low growth because of weak demand Not confident
There is obviously huge uncertainty about whether the pre-pandemic low growth, low interest rate environment will reassert itself. My worry in this context would be that the pandemic leaves us with lasting demand headwinds in the medium term (e.g. through planned tax rises or a deterioration in the terms of trade). The current bout of inflation complicates the response of macroeconomic policy makers to that. This is a recipe for a disappointing recovery and a continuation of the post financial crisis stagnation.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Low growth because of worldwide structural challenges Not confident
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Low growth because of worldwide structural challenges Not confident
Growth rates are difficult to predict. Long-run growth is mainly due to supply side factors. Except in the short run, growth has little to do with demand or stabilisation policy. Currently the UK is facing stagflation due to worldwide factors. The experience of the 1970's shows that it is better to take a short-term hit to growth to control inflation than to try to sustain demand in the face of a big supply shock. This is a lesson that seems to have been forgotten.
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Low growth because of UK-specific structural challenges Very confident
There will be global headwinds too, but the UK will under-perform it's international peers.
Natalie Chen's picture Natalie Chen University of Warwick Low growth because of UK-specific structural challenges Confident
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Low growth because of UK-specific structural challenges Confident
The specific structural factor for the UK is Brexit. This will depress investment and/or technical progress because of reduced trade and less FDI. However I suspect weak demand and international structural factors will also play a lesser role.
Lucio Sarno's picture Lucio Sarno Cambridge University Low growth because of worldwide structural challenges Confident
Gino A. Gancia's picture Gino A. Gancia Queen Mary University of London Low growth because of UK-specific structural challenges Not confident
Alessandra Bonfiglioli's picture Alessandra Bonf... Queen Mary University of London Low growth because of UK-specific structural challenges Confident
Richard Portes's picture Richard Portes London Business School and CEPR Low growth because of UK-specific structural challenges Very confident
Start with persistently low investment. Continue with Brexit and fall in trade. Add underperforming education system and impediments to research (e.g. destruction of research collaboration through EU Horizon programme and government indifference to science). Mix with continuing overemphasis on financial sector. Blend with all the global factors left out of this answer.
Vincent Sterk University College London Low growth because of UK-specific structural challenges Not confident
Andrea Ferrero's picture Andrea Ferrero University of Oxford Low growth because of UK-specific structural challenges Confident
I expect UK growth to be on average slightly below the average of other advanced economies because of Brexit-related factors.
Costas Milas's picture Costas Milas University of Liverpool Low growth because of UK-specific structural challenges Confident
I hate mentioning the obvious ("we told you so") but Brexit has started biting.
Roger Farmer's picture Roger Farmer University of Warwick Low growth because of UK-specific structural challenges Confident
In the near term, 3-5 years, the prospects for growth are poor as central banks raise interest rates to combat inflation. On 10 year horizons and longer, the move towards green energy will put a drag on growth as transportation, and other energy intensive sectors, are forced to transition away from fossil fuels. Eventually, as new technologies come online, they may lead to higher growth but I do not see that happening for at least a decade. On top of all of this is the aging of the population which means that there will a bigger drag on the economy from pensions and health and a smaller pool of domestic workers to contribute to productive activity.
Linda Yueh's picture Linda Yueh London Business School High growth because of structural factors Not confident
Ricardo Reis's picture Ricardo Reis London School of Economics High growth because of structural factors Not confident
Higher growth than in the last 15 years. A lot of potential that is not being used right now.

Question 2

Participant Answer Confidence level Comment
Jumana Saleheen's picture Jumana Saleheen Vanguard Asset Management Other or don't know Confident
I think the most important action policy makers can take is on climate change. Policymakers must set out policies and regulations that incentivise business to select the early action (orderly path) to net zero. These policies must go beyond the high level net zero commitments. They must be detailed, like the EU taxonomy and EU fit for 55 policies. They should include plans to increase carbon prices, and expand its use, as a way to internalise the price of greenhouse gas emissions.
Jagjit Chadha's picture Jagjit Chadha National Institute of Economic and Social Research Other or don't know Very confident
Start thinking about and preparing for the long run. Shor termist crisis management plagues economic policy in the UK and time and again constrains options in the face of successive crises. So all of the above in a new longer term framework.
David Cobham's picture David Cobham Heriot Watt University Raising public investment (in physical and human capital) Confident
But improving trade relations with the EU and reducing inequality would also make important contributions.
Kate Barker's picture Kate Barker British Coal Staff Superannuation Scheme and University Superannuation Scheme Ensuring high levels of aggregate demand Confident
Martin Ellison's picture Martin Ellison University of Oxford Improving trade relations with the EU and/or other countries Confident
Raising public investment in physical and human capital comes a close second.
Michael McMahon's picture Michael McMahon University of Oxford Raising public investment (in physical and human capital) Very confident
Public investment has been low for a long time since the post-GFC period of austerity. Addressing this deficit requires a great of investment in infrastructure and public services that would help improve the lives of ordinary people and raise productivity.
Chryssi Giannitsarou's picture Chryssi Giannitsarou University of Cambridge, Faculty of Economics Raising public investment (in physical and human capital) Confident
Patrick Minford's picture Patrick Minford Cardiff Business School Other or don't know Confident
As noted in my first comment, the key elements are a) to open up regulation in the UK's common law tradition based on empirical evaluation of evolving results from trialling new production methods rather than closing down new methods by risk-averse bans b) to open up trade with non-EU countries via free trade agreements. Policymakers must be robust in opposing regulative and protectionist demands from domestic lobbies.
Paul De Grauwe's picture Paul De Grauwe London School of Economics Improving trade relations with the EU and/or other countries Confident
John VanReenen's picture John VanReenen London School of Economics Raising public investment (in physical and human capital) Very confident
See LSE Growth Commission work https://cep.lse.ac.uk/LSE-Growth-Commission/files/LSEGC-2012-report.pdf
James Smith's picture James Smith Head of Macroeconomic Policy, Resolution Foundation Ensuring high levels of aggregate demand Confident
A key area in which policymakers have struggled since the financial crisis has been weak stabilisation policy. Since 2012, for example, monetary policy has become much less active (with the arguable exception of the pandemic) and fiscal policy has tightened despite a disappointing recovery (although was very active during the pandemic). Once we get past the high inflation of the next year or so, it will be important to ensure that both fiscal and monetary policy work in a complementary way to make sure the recovery from Covid-19 is complete and that policy is able to respond aggressively if the outlook deteriorates. There is also a case for policies which boost public investment, addressing some of the structural issues faced in the UK and 'crowding in' private investment.
Wouter Den Haan's picture Wouter Den Haan London School of Economics Raising public investment (in physical and human capital) Not confident
Michael Wickens's picture Michael Wickens Cardiff Business School & University of York Other or don't know Confident
Policymakers can't do much to improve growth in the next decade. To enhance growth they need to stop interfering in the economy and instead encourage private enterprise. This will be challenged by those who see the role of government as leveling up incomes. Leveling up should be confined to public infrastructure projects, especially in the North, and not income transfers.
Ethan Ilzetzki's picture Ethan Ilzetzki London School of Economics Improving trade relations with the EU and/or other countries Confident
Natalie Chen's picture Natalie Chen University of Warwick Improving trade relations with the EU and/or other countries Confident
Simon Wren-Lewis's picture Simon Wren-Lewis University of Oxford Improving trade relations with the EU and/or other countries Confident
See my answer to Q1. Reducing trade barriers with the EU (realistically through a soft Brexit) is critical. However maintaining a high level of aggregate demand and high public investment will also be very important. In contrast trying to 'repair' public finances will almost certainly reduce both aggregate demand and public investment and will therefore reduce growth.
Lucio Sarno's picture Lucio Sarno Cambridge University Repairing public finances Confident
Gino A. Gancia's picture Gino A. Gancia Queen Mary University of London Other or don't know Confident
Alessandra Bonfiglioli's picture Alessandra Bonf... Queen Mary University of London Reducing inequality Not confident
plus, accelerating the green transition
Richard Portes's picture Richard Portes London Business School and CEPR Raising public investment (in physical and human capital) Confident
Aggregate demand pressure is indeed important, but investment (including education) is key, and private investment should follow well-directed public investment - if we can manage that.
Vincent Sterk University College London Improving trade relations with the EU and/or other countries Confident
Roger Farmer's picture Roger Farmer University of Warwick Raising public investment (in physical and human capital) Confident
Although there is convincing evidence that aggregate demand policies can influence the LEVEL of economic activity, there is less convincing evidence that these policies can influence the GROWTH RATE. There is, however, a role for investment in public infrastructure. Economic activity is concentrated in urban areas connected by road and rail networks and served by world class universities. In the UK, London and the areas around Oxford and Cambridge are by far the most important drivers of growth. The most significant potential opening for public policy to contribute to economic growth is through the promotion and creation of infrastructure in the regions that will provide a catalyst to private enterprise and the potential for connected networks of businesses that replicates the success of London and the South East.
Andrea Ferrero's picture Andrea Ferrero University of Oxford Improving trade relations with the EU and/or other countries Confident
Measures to mitigate the negative impact of Brexit should help the UK economy regain some of the lost ground.
Costas Milas's picture Costas Milas University of Liverpool Improving trade relations with the EU and/or other countries Confident
Linda Yueh's picture Linda Yueh London Business School Raising public investment (in physical and human capital) Confident
Morten Ravn's picture Morten Ravn University College London Other or don't know Confident
I think a broad suite of policies are needed included some of those mentioned such as investment in human capital, foreign trade, and reforms to welfare systems providing both better social insurance and improved access and incentives to a good life for those coming from more challenging socio-economic backgrounds. There may also be a need for considering regulatory frameworks ensuring a better functioning market economy. On the positive side, the UK economy has some fundamental strengths which it can build upon and which possibly would increase the payoffs of undertaking these policies.
Ricardo Reis's picture Ricardo Reis London School of Economics Repairing public finances Not confident
Very hard to pick one. There are no magic bullets in economic policy