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In a world reeling from soaring inflation and weak growth, the UK holds a special place. It’s on track to be the advanced nations’ stagflation capital. Prices are expected to rise 13.1% over this year and next, the most in the Group of Seven, and the UK will drop to the bottom of the pack for growth in 2023, according to the International Monetary Fund. The National Institute of Economic & Social Research reckons the country will be in recession before next year.
It’s a curious form of exceptionalism but one that’s become all too familiar. Whenever a squall in the global economy lands on the shores of the UK, it has a tendency to turn into a tempest. The collapse in 2020 after Covid-19 struck was the deepest of the G-7. Fourteen years after the 2008 financial crisis, the government still owns 48% of NatWest Group Plc, the rebranded Royal Bank of Scotland. The US, where it all started, moved on long ago.
When trouble strikes, the UK ends up sprawled on the canvas because, more than others, its economy lacks resilience. It’s a lesson in the dangers of just-in-time hyperefficiency, a culture focused more on cutting costs than on investing for the future. Never has that been more apparent than now. The UK’s inflation shock will be nastier than in the US and Europe, says Alfred Kammer, the IMF’s European director, because it combines “the worst of the two worlds”—America’s labor shortages and Europe’s energy crisis. Both can be traced to structural capacity shortages.
Almost half of the UK’s gas is domestic, sourced from the North Sea, but there’s no storage. Rough, the last major facility, was closed in 2017 because it had become “uneconomic,” according to its owner. This, combined with a laissez-faire approach to energy security that’s put almost half the country’s nuclear power capacity on track to be decommissioned by 2024—two years before any replacement comes onstream—has left the UK exposed to the whims of the spot price in energy markets. High fuel prices are punishing households and spurring the cost-of-living crisis.
It’s not hard to see what the alternative might’ve been. In the past few weeks the UK has imported so much liquefied natural gas (LNG) that it has more than it can use. The UK’s gas price is now a third lower than continental Europe’s. Were Rough still open, the energy shock would be less severe. The crisis is partially self-inflicted.
A similar story can be told about the tight labor market. Michael Saunders, a member of the Bank of England’s rate-setting Monetary Policy Committee, on May 9 said it was “possible that Brexit has steepened the wage and price curves” by reducing labor supply and curtailing some imports.
The labor market is now so tight that, for the first time ever, there are more job vacancies than there are unemployed. Since the start of the pandemic, the workforce has shrunk by 440,000. Almost half the decline can be accounted for by a drop in EU workers. Former Monetary Policy Committee member Adam Posen told members of Parliament on May 11, “A substantial majority of the inflation differential for the UK over the euro area is due to Brexit.” Leaving the European Union, Britain exposed its over-reliance on cheap migrant labor.
The Covid recession in 2020 also showed the danger of short-sightedness. The government’s lockdown policy was meant to prevent the National Health Service from being overwhelmed. Years of underspending, relative to gross domestic product per capita, had stretched the NHS to its limits. With little give in the system, lockdowns had to be extended to prevent even more deaths.
Undercapacity was to blame again with regard to the stockpile of personal protective equipment, much of which had degraded before Covid. In the global scramble for supplies, the UK overpaid to such an extent that it wrote off £4.7 billion ($5.9 billion) in “inflated prices” and a half-billion pounds in unusable gear, the Department of Health and Social Care later said.
Turn the clock back further, and the same lack of resilience was true of UK banks. In 2008 they were running on fumes. RBS’s equity capital was so thin that losses of only £1.97 on every £100 of loans were enough to bankrupt the lender, the UK financial regulator later calculated. Banks around the world were undercapitalized, but the UK’s biggest was the worst.
UK business in general embodies this trimmed-to-the-bone approach, choosing to cut costs rather than invest in growth. Businesses invest only 10% of GDP in the UK, vs. 14% in the Organization for Economic Cooperation and Development, and spend a third less training staff. One European industrialist put it this way: When the Germans see a shiny new machine, they want it; when the Brits see it, they ask how much it costs.
The government set the tone in the 1980s when it sold off the family silver to pay its bills. Companies were privatized and social housing sold sometimes “below their retention value,” Richard Hughes, now chairman of the government’s fiscal watchdog, the Office for Budget Responsibility, wrote in 2019.
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Topic: Bloomberg take on UK's unique way of doing business (Read 1540 times)