Poor productivity stifling UK growth even without Brexit anxieties

A coming Brexit reckoning has left the UK economy facing slow growth at best, as negotiations struggle to progress between Britain and the European Union. However, a new report suggests the UK economy also has significant issues to resolve domestically, with stagnant wages seeing the nation failing to move beyond a productivity gap which is holding growth back even before the UK has completed its divorce procedings.

With six months left to broker a deal, while the UK Government and negotiators from Brussels remain at an impasse, the one thing that can be said with any confidence about Brexit is that nobody can be sure what the future holds for the project. In recent months, reports have suggested that small businesses in Britain remain bullish about their post-EU prospects, while studies on its impact on the civilian populace found Brexit will cost households an additional average of £134–758 every year, even if the UK strike free trade deals with non-EU countries, while that figure could rise by 20-45% without the deals, at £245–961.

With regards to that, at time of writing, the UK and the EU still seem no closer to resolving disputes over a hard border in Ireland, or a number of other factors obstructing progress in negotiations, over 18 months into the UK’s secession from the union of 28 countries. To that end, top consulting firms have been warning their clients for months that while they might still hope for the best, they should prepare for the worst. Hard Brexit, or a no deal scenario, increasingly looks like the most likely outcome, presenting a number of issues which could hamper economic growth in the UK, especially if businesses do not prepare now.

In the latest report from Big Four firm KPMG, the firm remains ambiguous about exactly what Brexit could mean for the British market, but one thing is clear, without dealing with the nation’s continued productivity crisis, growth will remain sluggish. According to the Economic Outlook Report, the UK economy is set for modest growth if a positive Brexit deal can indeed still be reached with the EU, KPMG predicts that UK GDP will grow by 1.3% in 2018 and 1.4% in 2019. While this might seem positive, it would mark the lowest rate of growth since 2008 and 2009, during the global financial crisis, and suggesting the UK may be facing an on-coming storm.

As mentioned, that estimation is are based on the assumption that the UK government will achieve a relatively friction-free Brexit and transition deal. If, as seems very possible, a disorderly Brexit were to occur – especially after Prime Minister Theresa May warned Members of Parliament to accept her Chequers plan, or face crashing out of the European Union – KPMG’s analysts predict that the UK will see a rapid slowing of growth to 0.6% in 2019 and 0.4% in 2020.

Commenting on the report, Yael Selfin, Chief Economist at KPMG UK, said, “If negotiations between the EU and UK result in a relatively friction-free agreement, then growth is likely to remain around 1.4% in the medium term as a result of relatively weak productivity. If we see a disorderly Brexit, growth will obviously slow more dramatically. If negotiations end well, the MPC are likely to raise interest rates to 1% at the tail end of 2019. If no deal is reached, the MPC will need to use interest rates to soften the economic impact.”

Productivity gap

At the same time, as mentioned, Brexit uncertainty is not the be all and end all of growth in the UK. KPMG also highlighted that poor productivity continues to blight Britain’s economy, as businesses struggle to recruit because of dwindling spare capacity. High employment rates are traditionally seen as a boost for the economy, however, as wages of the average worker have not risen to even match levels of inflation, the boon to the economy which high employment can provide has been hamstrung.

Meanwhile, the manufacturing sector is still seeing low export levels despite the weakness of the pound. Economic growth had to an extent been buoyed by the lower value of the pound, incentivising global investors to buy British products at bargain prices – however that activity has cooled dramatically in 2018. As the prospect of a cliff-edge withdrawal from the EU threatens to impact on the ease by which UK-based supply chains can sell goods to mainland Europe, manufacturer exports have been hampered by the continuing haze of confusion surrounding what 2019 holds.

At the same time, KPMG expects workers will likely see pay growth of around 3%. At the same time, inflation will fall, but only to 2.2%, minimising the benefits this could yield in terms of disposable income, particularly as many employees remain saddled with large debt burdens thanks to their stagnant wages, with eight in 10 currently unable to make ends meet without credit between paycheques. This has majorly impacted upon the retail sector in particular, and post-Brexit a further failure to address this matter will see retail continue to face a challenging environment.  

Yael Selfin further remarked, “Brexit will have a lasting effect on the UK, but economically it isn’t the only game in town. Issues such as improving productivity, reducing regional economic disparity, and ensuring that UK workers have the skills to meet employers’ needs should also be at the forefront of the Chancellor’s mind. Bringing productivity growth back to pre-2008 levels alone could see the British economy grow by more than 2%.”