UK Economy: Growth, Inflation and Productivity

Baroness Lea of Lymm Excerpts

Thursday 29th June 2023 Lords Chamber

[Baroness Lea of Lymm (Con)]

I welcome the opportunity to participate in this very important debate today. It is of course a wide-ranging debate and, rather than trying to cover all the points, I shall just make some observations that I trust are relevant.

First, I would like to put our recent growth performance into some sort of context. Between 1997 and 2010, GDP grew by an average annual rate of nearly 2%, although this was depressed by the sharp recession in 2008-09, associated with the 2008 financial crisis. Between 2010 and 2019, GDP grew again by an average annual rate of nearly 2%, despite the coalition’s restrained fiscal policies, introduced to regularise public sector borrowing, which had ballooned in the 2008-09 recession. Note that the economy did not go into recession after the Brexit referendum, despite the blood-curdling warnings by the Bank and the Treasury.

However, GDP slumped by 11% in 2020, during lockdown. This appears to be much more severe than other major economies experienced, although, as the ONS has pointed out, this partly reflects methodological differences. Believe me, international comparisons are fraught with statistical problems. GDP has just about reached its pre-pandemic level now, but it has been a hard and cruel path. Given the severity of the lockdown, any impact on the economy from Brexit is incredibly difficult to assess. It is reasonable to suggest that the introduction of various trade frictions would dampen trade, but the data show that the goods trade picked up strongly in 2022 after weakness in 2020 and 2021, which was more connected with the lockdowns.

Looking ahead, growth prospects are not encouraging. Granted, the IMF, the OECD, the Bank of England—Uncle Tom Cobley and all—have all revised up the exceptionally gloomy forecasts they made earlier this year and so far the UK has avoided recession, unlike Germany. Even so, the forecasts remain disappointing. For example, in May the Bank projected growth of just 0.25% for this year, followed by 0.75% next year and in 2025. Moreover, given possible further monetary tightening to tame inflation, I still do not rule out a possible recession.

Secondly, it cannot be exaggerated how profound the economic hangover from lockdown has been. Three things stand out for me. The first is the huge cost to the Exchequer, which the National Audit Office estimates to have been nearly £380 billion. The second is the continuing hit to output, and hence to productivity, of public services, including education and health. I welcomed the Chancellor’s recent announcement of a public sector productivity review

“with the Treasury acting as an enabler of reform”.

Well, come on, Treasury—enable. The third thing is the decline in the workforce, which the Chancellor sought to address in the March Budget with his “back to work” measures. According to the ONS, in the three months to April the number of “economically inactive” people, those aged between 16 and 64 who are not in work and not looking for work, was still 350,000 higher than in the three months to February 2020. This helps to explain the tightness of the labour market, which is a major supply problem.

Thirdly, I agree that inflation has to be a major concern. The CPI inflation rate was 8.7% in May, unchanged from April. The core rate picked up to 7.1%. As we know, inflation started picking up in mid-2021, reflecting supply-side constraints and disruptions after lockdown. I remember the Bank’s then chief economist Andy Haldane warning about inflation; he was very clear. Incidentally, he voted to curtail QE in May 2021. The rest of the Bank, unfortunately, was not listening.

This was followed by the specific energy price shock following the Russian invasion of Ukraine in February 2022, which gave another kick to price inflation, and an understandable pick-up in wages enabled by the tight labour market. Now, even though producer price inflation abates, these higher labour costs are feeding into consumer prices—the wage-price spiral of old. Rather late in the day, the Bank began tightening policy. Despite voices urging a pause—after all, monetary policy acts with long lags—more interest rate rises seem likely. As I have already implied, this risks recession.

Finally, and briefly, I come to productivity, which is usually taken to mean labour productivity as calculated by output divided by a measure of labour inputs—whether hours, jobs or workers. At one level this is just a statistical calculation and not an end in itself. Any policies that increase output growth, excluding policies specifically geared towards increasing labour market inputs, will increase productivity growth. But we all know that productivity growth is not just a matter of statistics. If we are to improve our growth prospects, we must raise our productivity game, especially given the tightness of the labour market. This includes encouraging capital investment and, of course, investment in people and skills.