In a word: productivity. We explain why
quarter of 2022 was a good one for the British economy. According to updated figures published on June 30th, GDP grew by 0.8%, compared with the last quarter of 2021. That easily beat the rest of the G7 and the OECD average . In 2021, too, Britain led the G7 with growth of 7.4%. Stand back, however, and the picture is less bright. Last year marked only a partial rebound from the G7’s sharpest contraction in 2020, amid covid-19 lockdowns.
What, in turn, lies behind Britain’s sluggish productivity? There are plenty of likely culprits, none wholly innocent. The financial crisis slowed the flow of credit. One study has found that firms with weak balance-sheets before the crisis found themselves short of finance after it. Their TFP growth suffered, partly because they innovated less. Another points to a TFP slowdown in financial services and other technology- and knowledge-intensive industries.
Then came Brexit. Even though Britain did not leave the EU’s single market until the end of 2020, more than four years after the referendum, uncertainty over the impending departure weighed on investment. Brexit is likely to keep on depressing Britain’s productivity. Erecting barriers to commerce with the country’s biggest trading partner makes supply chains less efficient and has limited the market some British companies can serve.
Brexit adds to problems that were already deep-seated. Investment was a bugbear long before it. For around 30 years Britain has invested less, as a percentage of GDP, than have America, France and Germany. It also devotes a smaller share of GDP to research and development. Some point to restrictive planning laws—for example, constraining building around innovation hubs such as Cambridge and Oxford.
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