Vicky Pryce is an economist and commentator and former joint head of the UK Government Economic Service.
Two important sets of figures published in a week, two vastly contrasting fortunes. The eurozone had the best business monthly performance for six and a half years, with jobs growth and factory orders at 17-year highs, according to the November purchasing managers index (PMI) from IHS Markit. Growth in the fourth quarter could well reach an annualised 3%.
In the UK, on the other hand, the Office for Budget Responsibility (OBR) has downgraded our economic prospects. Already at the bottom of a league table of G7 countries on growth so far in 2017, the UK economy is now likely to expand by 1.5% or less every year during this parliament. And one imagines that would be even worse if the Brexit negotiations break down.
The main reason for pessimism is lower productivity growth. This has been more or less stagnant in the last decade after rising by some 2% a year in the decade before the financial crisis. The OBR has finally accepted that there is no going back to those high-performing days. Its reworking of what productivity can be expected for the next five years means slower growth, continued squeeze on incomes and higher borrowing than would otherwise have been the case.
This is hardly surprising. Businesses, just recovering from the financial crisis and beginning to rebuild their capital, have been under-investing since the uncertainty of Brexit has hit home. Increased demand has mostly been met by the less risky route of hiring more people rather than spending on plant and machinery or new systems that would have increased output per hour and output per worker.
Ironically the trends would have been even worse were it not for Europe’s strong recovery. The UK’s increase in exports in recent months has reflected up to a point the sharp drop in the exchange rate since the referendum. But much of the growth has also been the result of strong demand from the other 27 EU countries. Business confidence is returning across the region, despite political problems in Germany and Spain, resulting in increased domestic demand but also a more general upswing in world trade. Even Greece is now recovering.
If business investment in the UK returns to growth next year as the OBR now expects, however tepid, it will be in no small measure due to a resurgent eurozone. But the weaker growth forecasts now suggest that even strong exports to Europe won’t be able to obscure for long the self-inflicted economic malaise which is threatening to grip the UK as Brexit looms.
