19/12/2022

UK economy lags G7 peers in post-pandemic recovery

Share on linkedin
Chalk logo

Introduction

A look at the outlook for UK GDP growth and why it will remain challenged relative to its G7 peers. 

Authors: Filippo Cartiglia

Economic growth is a key focus of Rishi Sunak’s UK government, but upon close inspection the UK economy has a fight on its hands. Data reveals that the UK is the only G7 country whose GDP has failed to move into positive territory since the Covid-19 pandemic. As of Q3 2022, it was still -0.8% below the Q4 2019 pre-Covid level, lending evidence to suggest that the full impact of the pandemic has yet to be resolved.

 

By comparison, real GDP has risen by 4.2% in the US and by 2.2%1 in the Eurozone.

The chart below illustrates the situation.

Source: Bloomberg

As can be seen, all three economies suffered a sharp decline and fast V-shaped recovery immediately after Covid broke out. The US was the quickest economy to recover back to its pre-Covid level, by March/April 2021, but by comparison, the UK would appear to have suffered a deeper, longer decline that has yet to be reversed.

 

All three economies have been experiencing a slower rate of growth during the past two quarters suggesting that the bulk of the post-Covid recovery has been realised.

One of the reasons for why the US economy has proven resilient, certainly in the last 12 months, is due to it being less adversely affected by the energy shock than Europe, where the fundamental problem has been an increase in the price of natural gas coming from Russia. By contrast, the US has largely been insulated from the energy crisis. Indeed, between March and October this year, it was the biggest importer of LNG to Europe, shipping 30.8 million tons as the region weans itself off Russian reserves.

 

This reliance on finding energy alternatives, coupled with the ongoing war in Ukraine, is likely to curtail GDP growth in the UK, Germany and France in 2023, compared to their G7 non-European peers.

 

All of which presents something of a headache to Sunak’s government. Why has the UK experienced such sluggish GDP performance and what might the solution be?

 

Delving into the figures to try and explain the UK’s GDP shortfall, it can be found that total hours worked in Q3 2022 were 1.1%2 below their Q4 2019 level. Moreover, the employment inactivity rate (those who are no working nor seeking to work) was 1.2% higher than 2019’s level while the employment rate was 1.1% lower: meaning fewer people in the labour market and fewer jobs being created.

 

The International Longevity Centre, a UK think tank, suggest in its Plugging the Gap report, that the UK economy could have a labour shortfall of 2.6 million workers by 2030. Currently, the country faces a shortfall of 600,000 workers deemed unwell to work because of health reasons.

 

This labour shortage explains why GDP growth has been so challenging, even though another key metric, the unemployment rate, is lower than it was pre-pandemic: 3.7% in Q4 2022 compared to 3.8% in Q4 2019.

The fact of the matter is, the UK is suffering from a more severe supply constraint issue than other G7 countries.

 

Usually, in a recessionary environment there aren’t enough jobs. After the global financial crisis, a lot of people lost their jobs and the UK economy was in a bad state. Today, that’s not the case. The economy is not in a bad state and there are plenty of jobs. The food and beverage sector alone is crying out for workers, as is the tech sector. According to UK labour market statistics, there were 1.19 million vacancies for the period September to November 2022, which is 391,000 more than pre-pandemic levels.

 

Part of the reason for the increased inactivity rate, post-Covid, is health-related. Some people are suffering from long Covid, others need surgery or specialist treatment. NHS waiting lists are at record highs, according to the British Medical Association, having ballooned to over 7 million people from a pre-pandemic level of 4.2 million.

How can the UK remedy this problem?

Brexit meant a lot of European workers left the UK during the pandemic and simply haven’t returned. As a result, the UK economy lost a part of its population, whose inactivity rate, pre-pandemic was very low. Immigration therefore now be part of the solution to address the gap in supply and if done properly, could kill two birds with one stone.

 

In 2022, the UK has opened its doors to people from Hong Kong and from Ukraine. This has been a positive step and one that the UK government now has the chance to further pursue, attracting not just workers from the European Union but from across the globe. Doing so would go some way to addressing the UK’s tight labour market.

Some prominent figures such as Simon Wolfson, the chief executive of the UK clothing retail chain, Next, are urging the government to take a different approach “to economically productive migration” to address the labour shortage, even floating the idea of imposing a 10% tax on foreign worker salaries to ensure they are being brought in by necessity, over and above UK workers.

 

Until the labour shortage problem is overcome, the outlook for UK GDP growth will remain challenged relative to its G7 peers. 

Sources:

1: Fulcrum Asset Management LLP

2: Datastream

As can be seen, all three economies suffered a sharp decline and fast V-shaped recovery immediately after Covid broke out. The US was the quickest economy to recover back to its pre-Covid level, by March/April 2021, but by comparison, the UK would appear to have suffered a deeper, longer decline that has yet to be reversed. 

All three economies have been experiencing a slower rate of growth during the past two quarters suggesting that the bulk of the post-Covid recovery has been realised.

One of the reasons for why the US economy has proven resilient, certainly in the last 12 months, is due to it being less adversely affected by the energy shock than Europe, where the fundamental problem has been an increase in the price of natural gas coming from Russia. By contrast, the US has largely been insulated from the energy crisis. Indeed, between March and October this year, it was the biggest importer of LNG to Europe, shipping 30.8 million tons as the region weans itself off Russian reserves.

This reliance on finding energy alternatives, coupled with the ongoing war in Ukraine, is likely to curtail GDP growth in the UK, Germany and France in 2023, compared to their G7 non-European peers.

All of which presents something of a headache to Sunak’s government. Why has the UK experienced such sluggish GDP performance and what might the solution be?

Delving in to the figures to try and explain the UK’s GDP shortfall, it can be found that total hours worked in Q3 2022 were 1.1%2 below their Q4 2019 level. Moreover, the employment inactivity rate (those who are no working nor seeking to work) was 1.2% higher than 2019’s level while the employment rate was 1.1% lower: meaning fewer people in the labour market and fewer jobs being created.

The International Longevity Centre, a UK think tank, suggest in its Plugging the Gap report, that the UK economy could have a labour shortfall of 2.6 million workers by 2030. Currently, the country faces a shortfall of 600,000 workers deemed unwell to work because of health reasons.

This labour shortage explains why GDP growth has been so challenging, even though another key metric, the unemployment rate, is lower than it was pre-pandemic: 3.7% in Q4 2022 compared to 3.8% in Q4 2019.

The fact of the matter is, the UK is suffering from a more severe supply constraint issue than other G7 countries.

Usually, in a recessionary environment there aren’t enough jobs. After the global financial crisis, a lot of people lost their jobs and the UK economy was in a bad state. Today, that’s not the case. The economy is not in a bad state and there are plenty of jobs. The food and beverage sector alone is crying out for workers, as is the tech sector. According to UK labour market statistics, there were 1.19 million vacancies for the period September to November 2022, which is 391,000 more than pre-pandemic levels.

Part of the reason for the increased inactivity rate, post-Covid, is health-related. Some people are suffering from long Covid, others need surgery or specialist treatment. NHS waiting lists are at record highs, according to the British Medical Association, having ballooned to over 7 million people from a pre-pandemic level of 4.2 million.

How can the UK remedy this problem?

Brexit meant a lot of European workers left the UK during the pandemic and simply haven’t returned. As a result, the UK economy lost a part of its population, whose inactivity rate, pre-pandemic was very low. Immigration therefore now be part of the solution to address the gap in supply and if done properly, could kill two birds with one stone.

In 2022, the UK has, this year, opened its doors to people from Hong Kong, from Ukraine. This has been a positive step and one that the UK government now has the chance to further pursue, attracting not just workers from the European Union but from across the globe. Doing so would go some way to addressing the UK’s tight labour market.

Some prominent figures such as Simon Wolfson, the chief executive of the UK clothing retail chain, Next, are urging the government to take a different approach “to economically productive migration” to address the labour shortage, even floating the idea of imposing a 10% tax on foreign worker salaries to ensure they are being brought in by necessity, over and above UK workers.

Until the labour shortage problem is overcome, the outlook for UK GDP growth will remain challenged relative to its G7 peers. 

FC150W 151222

About the Author

Filippo Cartiglia

Filippo is a member of the Investment Team. Before joining Fulcrum in 2020, he was the chief economist at Arrowgrass Capital Partners LLP. Prior to this, Filippo was Managing Director at Goldman Sachs, partner at Newman Ragazzi LLP, and an economist at the International Monetary Fund in Washington. Filippo graduated from Bocconi University in Milan in 1988 and gained a PhD in Economics from Columbia University in New York in 1992.

Your privacy

Cookies are data files that are stored on your computer or other smart device by a website’s server. Each cookie is unique to your web browser. It will contain some anonymous information such as a unique identifier, website’s domain name, and some digits and numbers. Cookies are useful as they allow us to recognise a user’s device and its preferences in order to ensure that our website works properly. By continuing to use this website, you consent to the use of our cookies.

 

You can find out the different types of cookies used on our website in our Cookies and Privacy Policy.

Necessary cookies