- While the US is ramping up domestic investment to bolster growth, a cash-starved British government is trying to spend its way out of trouble
- Without the lifeblood of new investment to replace departing industries, the UK could be heading into a new economic ice age
It’s a tale of two economies, one full of promise for the future and the other beset with problems. US President Joe Biden’s recent upbeat State of the Union address was in stark contrast to a UK government struggling to free Britain from the grip of recession.
Biden is committed to ramping up domestic investment to bolster US growth. Meanwhile, a cash-starved UK government is desperately spending its way out of trouble.
The secret to sustainable recovery is stronger investment, and the UK economy is falling miserably behind. Three years after leaving the European Union, British companies are attracted by better opportunities abroad and quitting the country.
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If Brexit was supposed to be the launch pad for a manufacturing idyll operating on Europe’s fringe, the dream is turning into a nightmare. UK economic policy needs to change fast before the ship goes down with all hands.
The UK might have dodged a recession in the last quarter of 2022, but there was little to cheer about as the economy flatlined in the fourth quarter after a 0.2 per cent drop in the third quarter. With gross domestic product sinking by 0.5 per cent in December alone, the economy is not out of the woods yet, with recession a frightening prospect for millions of UK households already experiencing deep hardship from the cost-of-living squeeze.
According to the International Monetary Fund’s January forecasts, a UK recession is imminent with economic output set to fall by 0.6 per cent this year.
Advanced economies have all suffered similar setbacks. The Covid-19 pandemic, supply chain disruptions, Russia’s invasion of Ukraine, the cost-of-living crisis and the rise in global interest rates have wreaked havoc with growth performance in the last few years.
But Britain has had more than its fair share of trouble. The continuing fallout from Brexit, the political crisis triggered by the resignation of former prime minister Liz Truss and the subsequent upwards lurch in mortgage borrowing costs have added extra dimensions of risk to Britain’s future.
While a UK recession looms large in 2023, the US economy is doing relatively better with employment conditions booming and US growth expected to come in at 1.4 per cent this year. There is even talk that with US inflation on its way down, the Federal Reserve might have room to cut interest rates later this year.
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Biden is definitely trying to doing his bit for growth ahead of next year’s US presidential elections. He is aiming to build an economy from the bottom up and the middle out, hailing the impact of measures such as his Infrastructure Investment and Jobs Act, with its focus on job creation in the transport, utilities and telecoms sectors.
The Inflation Reduction Act offers subsidies to companies which set up clean energy plants in the United States and awards generous tax incentives to consumers who buy new US-produced electric vehicles. It might look like protectionism on a grand scale, but it’s all designed to boost domestic manufacturing and draw direct investment from abroad.
Compare this against the UK’s recent record on economic regeneration and it looks like British industry is going backwards. Government plans to rebuild an industrial power base in the north of the country seem to be stalling through a lack of resources, with UK public sector finances severely overstretched following the pandemic.
Meanwhile, the uncertain economic backdrop is discouraging private sector investment, with many companies blaming post-Brexit issues for holding back investment intentions. On a relative basis, the UK is heavily underinvested.
There’s a litany of examples where international companies are taking business elsewhere. Pharmaceuticals giant AstraZeneca recently announced it planned to build a new US$360 million manufacturing facility in the Republic of Ireland, blaming uncompetitive UK taxes. BMW is threatening to switch production of the iconic Mini to China unless the UK government offers attractive incentives to stay in Britain.
Meanwhile, British energy giant Ineos is building the new Grenadier 4X4 off-roader, rival to the Land Rover Defender, in France. It’s a worrying trend, depriving Britain of vital productive capacity it can ill afford to lose.
Where the UK once ranked highly in the global foreign direct investment rankings, international investors are now giving the UK a wider berth. In 2000, the UK ranked third behind the US and Germany for net foreign direct investment inflows. By 2021, the UK had dropped to 23rd place. Overseas investors are voting with their feet.
Without the lifeblood of new investment, the UK could be heading into a new economic ice age. It is a wake-up call for quick government action, with little chance of a U-turn happening soon.
David Brown is the chief executive of New View Economics
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