Reeves Faces Challenges as UK Economy Stalls Ahead of Budget

The UK economy continues to grapple with stagnation, raising questions about the effectiveness of policies proposed by Rachel Reeves, Chancellor of the Exchequer, as she prepares for her upcoming budget on November 26, 2024. Despite assurances to stimulate growth, Reeves faces significant criticism while also contending with broader economic forces that may be beyond her control.

Governor Bailey Highlights Structural Challenges

Andrew Bailey, the Governor of the Bank of England, has shared insights that suggest Reeves may not be solely responsible for the UK’s economic stagnation. Drawing from his background in economic history, Bailey points to a persistent productivity crisis that has afflicted the UK since the financial crisis, a situation not seen in peacetime since the 19th century.

Bailey emphasizes that the sluggish growth may be attributed to global technological cycles rather than just domestic policy failures. He stated, “Supply-side growth has not been sustained over time. It comes in waves, with the real dial-moving changes being caused by so-called general-purpose technology innovations.” He referenced the historical significance of transformative innovations, such as the steam engine and the internet, in driving economic expansion.

The stagnation in productivity is stark: the UK has experienced an average growth rate of only 0.3% between 2008 and 2024, a significant decline from the 2.3% average growth seen from 1991 to 2007. Bailey suggests that had the economy maintained its previous growth trajectory, public debt would be around 82% of GDP instead of nearly 100%.

External Factors and Domestic Issues at Play

While Bailey’s analysis sheds light on external influences, it may also mask specific domestic challenges facing the UK. David Aikman, director of the National Institute of Economic and Social Research, asserts that the UK is an outlier among advanced economies, enduring 15 years of unusually poor productivity growth. He notes that this trend cannot be entirely explained by global technological developments.

Aikman points to volatile politics, weak investment in both public and private sectors, and a widening gap between businesses that adapt to technological advancements and those that lag behind. Reeves’ proposed supply-side measures, such as relaxing planning regulations, may only yield marginal improvements in this context.

Despite the challenges, some economists remain optimistic about the potential of artificial intelligence (AI) to drive future growth. Kallum Pickering, chief economist at Peel Hunt, believes that the UK, as the second-largest exporter of services globally, stands to benefit significantly from AI, which can enhance output without increasing employment. He argues that AI’s impact surpasses that of previous technologies.

Pickering likens the advances made by AI to a revolutionary shift, stating, “A personal computer or mobile phone is more akin to a hammer or chisel than to a robot.” However, he cautions that productivity gains from AI will only materialize once the technology is widely adopted throughout the economy. Initially, the transition may be painful for workers in sectors vulnerable to automation.

As the UK grapples with these economic realities, Bailey underscores the importance of conducive government policies and economic conditions to foster technological growth. Current concerns regarding energy shortages pose additional challenges, with Pickering noting that potential AI firms are hesitant to invest in the UK due to energy supply issues. “If we have a shortage of energy, we’ll always have a shortage of productivity,” he cautioned.

As Reeves prepares her budget, the intersection of domestic policy and global economic dynamics will be crucial in shaping the path forward for the UK economy. The upcoming weeks will be pivotal in determining whether her strategies can effectively address the deep-rooted challenges that have hindered growth.