An economy requires strong fundamentals and good decision making in order to take advantage of any opportunities it has for growth. The UK, like many economies, has suffered in recent years. The after-effects of the 2008 crisis left the country with high debt, low growth, and anaemic public spending. In the last five years, economic shocks caused by the pandemic and war on the continent exacerbated these problems, and no-one has forgotten the explosive failure of ‘Trussonomics’. A global trade war is the most recent headwind stifling economic progress, in the UK and elsewhere. Yet recent data quietly suggests there is reason for a degree of optimism. Getting to grips with the fundamentals of our economy can enable the UK to build on its internationally recognised strengths, especially its exposure to emerging technologies. Acknowledging the opportunities, not just the problems, the UK has before it is the first step to achieving our economic goals.
Economic Fundamentals
There is no getting away from the risks facing the global and domestic economies. Tariffs will likely lead to an inflationary shock, and consumer confidence in the UK is low. However, there are some areas in which the fundamentals of the UK economy suggest a certain level of resilience. The ONS estimated that the UK economy grew by 0.5% in February, well above the 0.1% growth that had been widely predicted by economists. It is too soon to fully unpick the relationship between the government’s economic policies since taking office last year and monthly economic growth. Nevertheless, it is a promising sign that the UK economy has been able to convincingly beat growth expectations. Whether growth or government policy will be able to withstand global economic pressures remains to be seen, but the fact that some growth has been registered this year indicates there is latent economic potential in the UK.
Tackling the cost of living and raising living standards is essential to restoring faith in government across the developed world, including in the UK. Core economic data also suggest progress in this area. UK employment has risen to 75.1% and, although unemployment stands at 4.4%, economic inactivity has decreased. Not only is this necessary for harnessing the productivity of the British workforce, but also for enabling working people to build personal economic security. Two other factors are important in this regard: wage growth and inflation.
Sensible and ambitious policymaking can see the UK take advantage of its great companies, exciting startups, and promising economic fundamentals.
According to the most recent ONS estimates, annual growth in employees’ average regular earnings is at 5.9%. Some economists have pointed out that this wage growth is out of sync with the lack of current productivity growth. However, maintaining wage growth throughout the economy is essential for recovering working people’s personal finances after almost two decades of no or low wage growth. The importance of strong wage growth should not be obscured by the UK’s long-running productivity problem.
Finally, using the CPI, UK inflation fell to 2.6% in March, down from 2.8% in the twelve months to February. Tariffs and their knock-on effects are likely to send inflation back in the wrong direction. But the fact remains that the inflation that has wracked the economy for the last several years has been brought within Bank of England’s target of 2% +/-1%. This is a positive reflection on policymakers’ decision-making in this country. Prudent choices, both by politicians and independent rate-setters, are going to be crucial to managing the uncertain political circumstances ahead. So too, will they be vital to taking advantage of any available opportunities.
Opportunities, AI, & Digital Technology
To these current economic fundamentals must be added the significant opportunities the UK has before it. Many great British companies and public services were sold to foreign private equity following the 2008 crash. But the UK retains many great companies. Historic financial institutions such as HSBC and Lloyds, oil majors Shell and BP, and market-makers such as the London Stock Exchange and London Metals Exchange remain British companies.
But the UK’s corporate landscape is not solely defined by the survivors from previous, more prosperous, times. A new accounting company set up by former Big Four partners, Unity Advisory, will be a UK company. Exciting innovators such as Wayve, an autonomous vehicle startup, and start-up accelerator Founders Factory have both raised over $1bn in investment. And it must not be forgotten that digital banking company Revolut (a British company) and Singaporean fast-fashion company Shein are seriously considering initial public offerings in London.
The potential to benefit from emerging technologies stems from the UK economy’s exposure to the AI and digital technology revolution. According to the IMF last year, the UK could stand to gain between a 10-16% boost to output as a result of its exposure to these technologies. This, the IMF said, places the UK in a position to reap double the rewards of other developed economies, especially due to its ‘robust digital infrastructure, skilled labor [sic] force, innovation ecosystem, and regulatory framework’.
Moving Forward
The vote of confidence from the IMF should be welcomed as a recognition of the advantages the UK currently possesses. There is no doubt AI and digital technology will shape the economic contours of the coming decades. The UK might not have the geopolitical power or the bountiful natural resources to compete with China and the US on all fronts. But it is certainly possible for the UK to compete in AI application development and to create digital sovereignty through investment in large domestic data hubs. This is not just an opportunity, but a necessity, for the UK’s economic success this century.
Are too many British companies bought out by foreign private equity? Yes. Do too many British startups relocate to other countries providing more willing capital markets? Yes. Is the UK, like all other countries, facing economic headwinds due to global political uncertainty? No answer required. But these issues should not obscure the fact that the UK is a robust economy with a number of opportunities before it. Sensible and ambitious policymaking can see the UK take advantage of its great companies, exciting startups, and promising economic fundamentals. Acknowledging this possibility is the first step towards making it a reality.
