We are in an unprecedented era of UK relative macroeconomic decline

Long time readers of this blog will be familiar with this chart, of UK real GDP per capita since just after WWII.

It shows a remarkably constant trend rise of output/income per head of 2.25% per annum since 1955. The booms of the mid-70s and end-80s, and the recessions of the early 80s are only just visible, but thankfully the trend in GDP per capita always reasserted itself. Until, of course, the period after the Global Financial Crisis, when it didn’t in a quite spectacular way.

Not only did we not bounce back in any way from that recession, but GDP per head started growing more slowly. (These observations are so much clearer when using GDP per head, rather than GDP which is strongly influenced by inward migration.) I watched and blogged in horror as the gap between the previous trend and what was actually happening to living standards [1] kept growing wider.

The little blip at the end is the pandemic of course, and once again using GDP per head shows clearly how we are yet to fully recover in terms of living standards. At the end of 2021 GDP per head was almost 4% lower than it was in 2019. (Once again, it shows how misleading using GDP data is if you are trying to gauge anything to do with welfare.) Remarkably GDP per head at the end of 2021 was only around 5.5% higher than it was at the end of 2007! (That is annual growth of less than 0.4%!).

However, using a constant trend rate of growth of 2.25% as a reference point was a convenience rather than a realistic aspiration. The main reason is that trend growth has for some time been slowing down across the world. What to use instead? In the chart below, I compare the UK to the global technological leader, the United States. I make no attempt to make a realistic comparison of levels of income per head, which is in any case distorted by factors like workers in the US have less holidays than we do in europe, for example. I’m just concerned with the trend rate of growth in GDP per capita.

I have scaled US GDP per capita (red line) so that it matches the level of UK GDP per capita from the mid-50s until the mid-80s. UK and US living standards were growing at a similar rate over that period. There was much angst in the UK at the time about economic decline, but that in part reflected a dynamic Europe, and also we were not catching up with what is generally agreed is a large level’s gap with the US. You can see by eye that US trend growth in GDP per capita starts to decline as we reach the middle of the period. 

The first interesting deviation from parity of growth rates starts in the mid-80s, and is clearer if I redraw the chart starting in 1979.

UK GDP per capita continued to grow at a constant rate in the 1980s and 1990s, while US GDP per capita growth started to decline from the late 1980s. This divergence grew wider during the period of the Labour government, such that by the end of 2007 we were ahead of the US trend by 6% compared to previous levels. You can tell many stories about this apparent success story, but it does correlate with more detailed studies of trends in growth over this period: the UK was more than holding its own, and catching up in level’s terms with the US and to some extent France and Germany.

But that is just the backdrop to the main point of this post. Since the GFC, the UK has been doing worse than the US consistently, reversing all of the post-mid 80s gains. Half of the 6% gain was lost during that crucial austerity period from 2010-12. Of course all countries around the world did badly through a common policy of austerity after 2010, with the important exception of China. Only in China was a substantial Keynesian expansion created that offset the impact of the GFC. But, compared to the US, the UK lost ground.

The next major period of UK decline began shortly after the Brexit referendum. By the end of 2019, that initial 2007 6% gain had fallen to little over 1%. The policy response in the pandemic made it worse still. By the end of 2021 the UK had fallen to just over 2% below the US line, reflecting a stronger (stimulus led) US recovery from the pandemic. If we take the period from the start of 2010 until the end of 2021 as a whole, UK GDP per capita appears to have grown by 6% less than US GDP per capita. That is, since 1955, an unprecedented period of economic decline for the UK.

To show this isn’t an artefact of my method, here is a small table

Country	GDP pc 2010	GDP pc 2221	Total growth	annualised
UK (ONS)	30027	32514	8.3%	0.7%
US (BEA)	202068	234497	16.0%	1.4%
Germany (ES)	31940	35250	10.4%	0.9%

In the table I’ve included data for Germany (the only major EU country with data for 2021 on Eurostat). Germany is also falling behind the US, but by less than the UK. The reason is straightforward - Germany is also addicted to an austerity mindset.

This is the reality behind the government’s bluster of strong and steady growth. Macroeconomic success should be measured in terms of GDP per head, and not the size of some government deficit. Forget cherry picked statistics after the UK suffered the largest fall in GDP during the initial pandemic. This is the reality - an unprecedented decade of relative macroeconomic decline that started in 2010, and with Brexit still influencing growth there is no end in sight.

This analysis ties in the underlying growth in the economy, taking out the direct impact of migration, with the UK’s so called cost of living crisis. These are not separate problems, but as Rachel Reeves highlighted in a recent speech they have a common cause, which is weak UK growth. The government cannot at the same time appear fatalistic about falling living standards and yet try to talk up UK economic performance, because to do so is mutually contradictory. Advancing living standards, particularly those at the bottom of the income distribution, is what good management of the economy is all about.

It is always relatively easy to find reasons why this UK macroeconomic decline is all bad luck, and nothing to do with policy. It always is. But since the Conservatives came to power in 2010 they have had two big economic ideas which directly influence macroeconomic performance. The first was prioritising reducing the deficit over the recovery from the GFC recession and, more recently, the pandemic recession. The second was Brexit. Both have been disastrous for the economy, and predictably so as they went against basic economic principles.

There is a refusal among Conservative MPs and ministers to recognise the recent reality of UK macroeconomic decline we are now living through (and its contrast to  our earlier strong performance), let alone their responsibility for it. Instead they live in a fantasy world, and try to convince us their fantasy is real. Apart from the regular use of cherry picked and misleading statistics, we have a situation where the queues of lorries waiting to be checked at Dover are nothing to do with Brexit, they tell us, but because of EU red tape. You wouldn’t want such people in charge of the most trivial tasks, let alone managing the economy. It is time to recognise the reality of recent UK macroeconomic decline, and to assign responsibility for it in two huge failures of economic policy.

[1] GDP per head is equivalent to the average income generated by domestic output per head. Of course that average is hiding the gradual redistribution of income towards the 1% in the 1980s and 1990s, a redistribution which has had a significant impact on median wage growth during that period. Finally the purchasing power of median UK earnings has declined because of two recent depreciations in sterling: the first during the GFC and the second after the Brexit referendum.