GDP growth is strong, but masks deep-seated structural problems in UK corporations | Larry Elliott

Britain had the fastest-growing economy among the G7 countries in the first half of this year. Unemployment is falling and wage inflation is also falling. Crisis? What crisis? As Jim Callaghan never said when he returned to Britain during the Winter of Discontent.

Key economic data released last week did not exactly back up the government's claim that the country was in its worst shape since 1945. That's a huge claim, given quarterly growth of 0.6%, annual inflation of 2.2% and unemployment of 4.2%.

Jeremy Hunt, the shadow chancellor, is ensuring that the government's claims are not left unanswered, which is politically sound for the Conservatives. When George Osborne made a similar claim in 2010, Labour was too busy with the leadership contest to refute it, and the claim was accepted as fact, which it certainly wasn't.

But this isn't a boom-boom Britain case. In fact, far from it. Ruth Gregory, a UK analyst at Capital Economics, says:

Overall, we are skeptical of the narrative that the UK is experiencing Goldilocks conditions, but it is clear that the story has changed from weak growth and high inflation to stronger growth and weaker inflation.

That sums up the position pretty well. Things were looking up (from a low point of view) in the first half of 2024 and there is no harm in Labour admitting that.

Voters voted the Conservatives out not because of the economy, but because of their record for 14 years. Even if Rachel Reeves raises taxes, she will give them some leeway in the October Budget, just as Gordon Brown did when he stuck to the strict spending plans he inherited from Kenneth Clarke in 1997.

But Reeves needs to make the right argument. Her argument should be that the Conservatives have failed to tackle Britain's long-standing productivity, investment and trade deficits, and that Labour can.

There is plenty of evidence to back up that claim. If you dig a little deeper into last week’s figures, it’s clear that the Conservatives have handed over an economy whose structural problems are deeper and, in some cases, worse than in 2010.

Let's analyze the growth figures. The 0.6% increase in activity in the second quarter was entirely due to the strong performance of the services sector. Manufacturing and construction both contracted. Although services account for about 80% of the economy, growth was uneven.

The UK has a poor record on business investment and despite Hunt's generous tax cuts, there is little evidence that businesses are responding to the more moderate economic backdrop with more capital spending. Business investment fell by 0.1% in the quarter and by 1.1% last year.

Moreover, GDP is a poor measure of how a country is doing. Even those who take it seriously will tell you that it is not GDP but GDP per capita that matters, and here the UK’s recent record is clearly unimpressive. GDP per capita rose by 0.3% in the second quarter of 2024, but it is more than 2% lower than before the pandemic began. The fact that people in the UK are poorer now than they were in 2020 is masked by population growth.

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The latest labour market figures show that the number of people on the payroll rose by more than 250,000 last year, but Britain’s productivity performance remains weak. Output per hour worked in the second quarter was 0.1% lower than a year ago and just over 2% lower than before the pandemic began. It doesn’t take a genius to see the link between weak investment, weak productivity and weak per capita income growth.

Analysis of regional labour market figures provides evidence of a north-south divide. The employment rate for England as a whole is 74.5%. However, employment in the South of England is above average at just over 78%, while in Wales it is almost 10 points lower at 68.9%. Scotland (73.4%), Northern Ireland (71.6%), the North East (69%), the West Midlands (72.7%) and the North West (73.1%) all have employment rates below the national average.

Parts of the UK that have traditionally relied more on manufacturing have significantly lower employment rates than service-focused areas. So it’s no surprise that the latest trade figures for the second quarter of 2024 show the UK running a massive $52.4 billion deficit in goods, partly offset by a $39.1 billion surplus in services.

Again, it’s easy enough to connect the dots. Manufacturing’s share of the economy has been steadily declining for decades, and as a result, Britain hasn’t had a trade surplus in goods since the early 1980s. On the other hand, Britain is second only to the US as an exporter of services, and the companies that handle these exports – banks, management consultants, architects – are largely located in the South East.

Simply put, the economy is in a cyclical uptrend, with expectations that wages will rise faster than prices and interest rates will fall further.

That doesn't mean all the economic problems have been miraculously solved. They certainly haven't. There are still structural problems. And yet, Labour is not doing itself any favors by exaggerating how bad the situation is. It needs to be told as it is.

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