Diamonds and Rust – What are the UK’s Economic Challenges?

The question, “What are the UK’s economic challenges?” might best be answered with, “How long have you got?” We summarise the problems below and temper them with some reasonable expectations – after all, it’s our job to see the opportunities.

Economic Challenges – A Big Bag of Bad

One of the most pressing challenges is sluggish growth. Brexit and the pandemic knocked UK GDP to the canvas, and we’ve struggled to regain our footing since. Growth has lagged other G7 nations, thanks to weaker investment, trade frictions and a tight labour market.

Low productivity hasn’t helped either. It limits wage growth and living standards over the long term. While things could be worse, productivity remains well behind that of the US.

What else isn’t working? Inflation is on the list. Since the early 1990s it’s broadly sat in the 0-5% range (apart from alpine levels caused by war in Ukraine and the pandemic). The latest rate of 3.5% is comfortably in that range. But it is well above the 2% target and ticking upwards.

If the government can grapple with both measures, they might find a solution to the cost of living crisis. Many families are struggling to cover the cost of essentials like food, fuel, and housing, putting pressure on consumption and exacerbating inequality. For example, households in London in the second lowest income bracket have seen a 29%  increase in the cost of goods and services over the three years since March 2020.

The Bank of England has raised interest rates to combat inflation, but it’s also increased borrowing costs and mortgage repayments, straining household budgets further.

What makes such inequalities worse is economic disparities between regions – which challenge the UK’s cohesion and growth potential. Take London and some of the Southeast out of the picture and there’s a tableau of underinvestment, lower educational attainment and poor infrastructure. Ever caught an Avanti West Coast train and got there on time? If so, you’re lucky: just 41.2% of their services arrived on time and 7.8% were cancelled. It’s comfortably the worst route in Britain.

The bad news keeps coming. As a nation we spend considerably more than we earn. Not that there’s anything new here, but there appears to be something structural about the deficit. In the past, governments would get spending below receipts once in a while. That hasn’t happened since 2000/01.

Total Government Spending and Receipts (% of GDP)

Negative data feed into negative sentiment. Business confidence is down and, at the time of writing, in negative territory. Consumer confidence muddles along but hardly encourages.

Emerging from the Tunnel

This is a complex set of problems for anyone to solve. And we haven’t even included that perennial of the UK omnicrisis: housing.

But are we judging it over the right timeframe? Matthew Freud is a lauded communications guru who has advised almost everyone. He rarely gives interviews but recently commented that, “In 10 months in government you can’t actually do anything. … Blair, in his book on leadership, says you basically can’t do much in a single term. You need two terms to sort of change things. … [It] is far too early even for an interim report card.”

And are we looking at our politicians in the right way? The lament that there are no great politicians any more is not a new one. Jonathan Powell, a senior political adviser, explained ten years ago that we see our leaders more. We see all their human failures and frailties in detail.

The government remains committed to stimulating growth – the highest in the G7 in fact. Amidst the dim of culture war and the 24 hours news cycle it’s easy to forget that. It’s reasonable to expect they’ll continue pursuing this elusive goal. Trade deals, more houses, removing frictions that impede infrastructure investment, more business investment and a ten-year industrial strategy. It’s hard to disagree with these priorities as they can feed into some of the most noxious issues, like economic inequality and poor business conditions.

In the Spring of last year we donned our rose-tinted spectacles and made the investment case for the UK. It was the right argument to make at the time. In fact, many of its lines of argument still hold true – after all, the stock market and the economy aren’t the same thing.

Yes, you wouldn’t have made much in, say, the FTSE All Share or the FTSE100 since we published that piece. But that’s why we encourage clients to diversify.

There are always opportunities in even the most unimpressive situations. We see them all the time. If you’d like to learn more, please get in touch on 020 7467 2700 or at hello@firstwealth.co.uk.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.