- Brexit is pretty much the only game in town for watchers of the UK economy right now.
- But away from the UK’s exit from the EU, Macquarie said a worrying new dynamic is forming in the economy.
- Supply-side limits on the economy, like the tight labour market, are likely to start having a negative impact.
- Macquarie calls it a “new era” for the British economy.
In the 816 days since Britain voted to leave the European Union, Brexit has been pretty much the only game in town for watchers of the UK economy.
But there’s a deeper change going on beyond Brexit related uncertainties. Analysts at investment bank Macquarie this week described what they call the beginning of a “new era” in the British economy.
Analyst Matthew Turner thinks low wage growth and full employment means the economy will struggle to grow in future unless it can crack the persistent problem of productivity.
“UK economic performance over last decade [has been] driven by greater resource utilisation on the back of strong population and employment growth,” analyst Matthew Turner wrote in a presentation titled: “A new era, even without Brexit.”
“That is now changing as supply-side limits bite, and how efficiently resources can be used will determine whether relative strong growth can be maintained.”
Turner’s argument is that rising employment and demographic strength allowed the UK to boom in the years since the worst effects of the financial crisis wore off. But that story is now coming to an end. Economic strength could suffer as a result.
Unemployment in Britain is pretty much as low as it can go, at just 4%. Employment growth boomed as unemployment fell, but growth is slowing. Meanwhile, wage growth is meagre, which creates a worrying economic disconnect.
“Rising nominal wages [is] needed to offset [the] expected fall in employment growth for aggregate spending to be maintained,” Turner said, noting that such a change ultimately needs higher productivity.
“At the aggregate level, this is reinforced by rapidly disappearing labour slack, meaning total household incomes cannot be boosted much more by rising employment, a key factor in the mid-2010s.”
At its simplest, Turner is effectively arguing that the number of people in employed in the UK is pretty much at a peak, meaning it will now struggle to create meaningful growth through simply adding more workers. Instead, it will need to improve productivity and output per person. There is currently little evidence of this materialising.
A key engine of growth is consumer spending. With low productivity persisting, and wage growth only increasing slowly, it is possible that household incomes could struggle going forward. This would likely be a major downside for UK growth as a whole.
Brexit will continue to dominate the economic story in the coming months, with forecasts of weaker growth once a deal is secured, or a major slowdown in the event of a no deal Brexit. But Macquarie’s analysis reminds us that there’s more going on in the economy than just the UK’s exit from the EU.
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