In the 15 years since the global crisis, UK growth has slowed to its lowest level since the Great Depression. This was part of a sharp decline in growth rates and interest rates in high-income countries. Prior to the epidemic, there were concerns in several countries about a ‘secular stagnation’ trap, an idea revived by Larry Summers (Summer 2014).
Even before the UK economy recovered to its pre-epidemic stage, Russia’s aggression in Ukraine had set new headwinds on UK economic growth. Conflict has led to rising energy and other commodity prices and threatened to disrupt the global supply chain. This creates the risk of additional limitations on potential global growth that may be permanent.
The causes of low growth before the epidemic were fiercely contested, and it is not yet clear how covid and geopolitics will further exacerbate or mitigate pre-covid trends. Several studies have emphasized the long-term structural driver of weak growth. Gordon (2016) argues that innovation on the border is declining in the post-war period, and Bloom et al. (2020) prove that the flow of new ideas has slowed down significantly in recent years. There is empirical support for this notion, for example from Fernald (2016) who observed that growth slowed down before the financial crisis at the (US) border. Fernald and Enclair (2022) have expanded this work into the UK context.
Other researchers have emphasized the importance of the financial crisis to slow growth through long-term weakness in demand. Blanchard and Summers (1986) argued that the steadily rising unemployment rate in the 1980s was due to ‘hysteresis’, which had a detrimental effect on high unemployment and long-term unemployment. Cerra et al. (2022) Review the literature on hysteria and how it relates to the global crisis. Recent studies, including Fornaro and Benigno (2018), have highlighted the possibility of a Keynesian ‘stagnation trap’ where pessimistic expectations become self-evident. A common thread in this work is the growing evidence that challenges the notion that macroeconomic policy has only a temporary effect on the size of the economy. Ilzetzki (2022) provides evidence of the opposite from WWII, where a high-pressure economy leads to high productivity growth.
In a recent significant contribution, Philippines (2022) argues that the disappointing growth rate reflects unrealistic expectations rather than weak economic performance. He showed that Total Factor Productivity (TPF) increased linearly, not significantly, as claimed in previous studies. Assessed in this light, productivity growth rates can be expected to decline over time, as TFP levels increase steadily.
There are more optimistic views about post-epidemic growth. For those who thought the original slowdown was a structural phenomenon, the epidemic has encouraged the adoption of new technologies and work practices (see, for example, Valero et al. 2021). For those who favor a more demand-side interpretation, the aggressive response to the epidemic at home and abroad provides reason to think that economies could be decisively shattered by the low growth and low inflation of recent years.
While there is clear uncertainty about the outlook, policymakers seeking a speedy recovery from the epidemic must face this uncertainty and determine how to improve their quality of life in the years to come.
The May 2022 CfM survey asked its UK panel members to anticipate the UK’s economic growth prospects and to propose policies that could improve the UK’s economic performance over the next decade.
Question 1: How do you see future (per capita) GDP growth in the UK in the next decade?
This question was answered by 25 members of the CfM-CEPR panel. There is almost consensus (80% of the panel) that the UK will experience lower growth in the coming decade. A majority (56%) of all respondents thought it would be due to a UK-specific structural challenge, while 20% believed it would be because the world economy would weaken; One single respondent (representing 4% of the panel) thinks this will be due to weak demand. In contrast, 12% of the panel think that the UK economy will experience higher growth due to structural factors. Single panelists do not believe that the economy will do well because of strong demand.
The main local structural factors that will pull the UK into the economy include Brexit and low-level investment (both cited by several panelists). Richard Ports (London Business School and CEPR) added a low-performing education system and “research barriers (such as the destruction of research collaboration through the EU Horizon program and the government’s indifference to science)” to the list. Roger Farmer (University of Warwick) cites changes in green energy and aging as additional factors.
Michael Wickens (Cardiff Business School and University of York) predicted lower growth due to global factors, but stressed that domestic (monetary) policy could affect how badly the UK is affected: “The experience of the 1970s shows that it is better to accept. A short-term blow to growth in controlling inflation rather than trying to maintain demand in the face of a large supply push. It’s a lesson that seems to have been forgotten. “
The James Smith (Resolution Foundation) is more concerned about weak demand in the medium term: “My concern in this context is that the epidemic will leave us with long-term demand headwinds in the medium term (such as through planned tax increases or deteriorating conditions).”
Patrick Minford (Cardiff Business School) disagreed with the majority view, believing that Brexit would be a boon rather than a drag on economic growth: Avoidance. It is able to open up the economy to global competition through a new free trade agreement with the non-EU world. “
Question 2: What is the most important contribution of economic policy makers to UK growth over the next decade?
Within the panel, 27 members answered this question. Thirty percent of the panel called for an increase in public investment and an additional 30 percent for better trade relations with the EU or other countries. Less than 10% of the panel cited one of the following policies: repairing public finances, ensuring high levels of aggregate demand, or reducing inequality, as the best way to promote economic growth in the UK. It should be noted that most panelists believe that a number, if not all, of these policy measures can and should be used to improve the UK’s economic performance.
Author Note: This survey will provide the context for the Economics 2030 research, a collaboration between the Resolution Foundation (RF) of the London School of Economics (LSE) and the Center for Economic Performance (CEP), and has been successfully funded by the Nuffield Foundation. The goal is to solve the question that can be navigated.
Bell, T, S Dhingra, S Machin, C McCurdy, H Overman, G Thwaites, D Tomlinson and A Valero (2021), “The UK’s decisive decade: The launch report for The Economy 2030 Inquiry”, Resolution Foundation & Center for Economic Performance, May.
Blanchard, OJ and LH Summers (1986), “Hysteresis and the European Unemployment Problem”, NBER Annual of macroeconomics 1: 15-90.
Bloom, N., CI Jones, J. Van Rinen and Michael Webb (2020), “Ideas Getting Hard to Find?”, American Economic Review 110: 1104-1144.
Cerra, V, A Fatás and SC Saxena (2022), “Hysteresis and Business Cycles”, Journal of Economic LiteratureUpcoming
Fernald, JG (2016), “Long-term reassessment of American growth: how low?”, Working Paper Series 2016-18, Federal Reserve Bank of San Francisco.
Fernald, JG and R. Enclare (2022), “The UK Productivity” Puzzle “In An International Comparative Perspective”, The Productivity Institute, Working Paper No. 020.
Fornaro, L and G Benigno (2018), “Stagnation Traps”, Review of Economic Studies 85: 1425-1470, July.
Gordon, RJ (2016), The Rise and Fall of American Growth: The Standards of American Living since the Civil War, Princeton University Press.
Ilzetzki, E (2022), “Education by necessity: government demand, power constraints, and increased productivity”, LSE, March.
Philippon, T (2022), “Additive Growth”, NBER Working Paper 29950, April.
Summers, LH (2014), “Reflections on the new ‘secular stagnation hypothesis”, VoxEU.org, 30 October.
Valero, A, C Riom and J Oliveira-Cunha (2021), “The Business Response of Covid-19 After One Year: Results of the Second Wave of the CEP-CBI Survey on Technology Adoption”, CEP Covid Analysis Series, no. 24, November.