The latest economic growth numbers may have been fairly unimpressive by most historical standards, but they were rather better than recent readings and surpassed market expectations. The first estimate of the size of the UK economy showed it had expanded by 0.3 per cent in the second quarter of this year, against a rise of 0.7 per cent in the first three months. Investors had “priced in” a minimal 0.1 per cent rise. The annual increase, ie on the same period last year, is 1.2 per cent. Is this good news or bad news?
What’s happening?
The pattern of sluggish economic growth that has prevailed in Britain, and most of the West, since the global financial crisis of 2008, is proving to be the new normal. It’s not what we had come to expect. For most of the postwar period, punctuated by stop-go cycles, average economic growth was running at 2 to 2.5 per cent a year, with some endemic inflation and structural unemployment. By the 1990s this had accelerated to something like 2.7 per cent, combined with lower inflation and unemployment.
In recent years, excepting the pandemic, growth has been more like 1 to 2 per cent. This is driven by low investment and a poor productivity record, exacerbated by market loss post-Brexit.
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Is this what Labour promised?
No. It gave the impression that the very act of electing a Labour government to replace the incompetent Conservatives would lift confidence and “kickstart” the economy, but no firm evidence of that has emerged. Expectations have not been fulfilled.
For example, the Labour manifesto stated: “Sustained economic growth is the only route to improving the prosperity of our country and the living standards of working people. That is why it is Labour’s first mission for government. It means being pro-business and pro-worker. We are the party of wealth creation.”
Rachel Reeves, when she was shadow chancellor, promised “securonomics”, but little has since been heard about that either; tax rises and welfare cuts have been the main talking points.
Will Labour’s policies work?
They may well do, but not necessarily fast enough to produce tangible results by the time of the next general election, and to rescue Labour’s second term.
There are many measures that should edge up growth, even if each is comparatively modest: the Brexit reset; trade deals with the US and India; making the public finances stable; reforming planning rules; expanding airports; building 1.5 million homes; green energy including nuclear power; loosening financial regulation; making room for cuts in interest rates; and some strategic investments in new sectors. Headwinds for the UK include the continuing world trade war, cuts in migration, a trend to higher debt-financing costs globally, and the prospect of more wars.
The problem is that any major investment drive takes years, which means that much of the benefit in lifting the trend rate of economic growth won’t be felt until the early to mid-2030s – by which time some other political party may be in power and claiming the credit.
What can Labour do?
Up its presentation. As with the NHS, voters need hard evidence that things are indeed improving, even if slowly, and that they are on the path to better times. That means explaining why present sacrifices have to be made, but also some vision of the rewards that will follow as a result. The party needs to boast and showcase its successes.
Does it matter?
The economy will always be central, which in a way is a strength for Labour given that it can’t win on the “culture war” issues. A display of determination and competence in running the public finances and the wider economy can win the confidence of the voters. Unfortunately, Reeves has made too many errors of political judgement to be confident that the public will be receptive to anything she says. But give it time, and some evidence of higher living standards and improved public services, and that can be turned around.
Is the opposition capitalising on Labour’s misfortunes?
Not that much. The words “Liz Truss” and “mini-Budget” still make people – including the current shadow chancellor – wince. The memories of the Tory years in power aren’t that rosy: a long spell of austerity, followed by Brexit, Partygate, splits, crises, and general “chaos and confusion”. Labour can still rightly pin some of the blame for “broken Britain” on 14 years of Tory rule.
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The electorate simply isn’t yet ready to give the Tories a hearing; they’ve apologised for Truss, but it’s not enough.
Meanwhile, perhaps from frustration with the two main parties, voters are curiously susceptible to the lavish and unrealistic promises made by Nigel Farage and Reform UK. Again, this could actually turn to Labour’s advantage if it concentrates on the not-too-difficult task of proving that Farage’s fantastical figures don’t add up. Not much sign of that yet, though.
Labour’s biggest problem isn’t so much the economy as complacency.