Economic strengths and weaknesses facing next UK government — in charts
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The UK’s lacklustre economic growth has been at the centre of the general election campaign, as both Labour and the Conservatives have promised voters that sunnier days lie ahead.
With a week until polling day, what are the UK economy’s strengths and weaknesses?
Growth
The UK economy has been ranked as the ninth-largest world economy since the start of this century, in terms of output at prices adjusted for purchasing power. It stands in sixth place when output is calculated at exchange rates.
Between 2010 and 2023, Britain’s rate of economic growth outpaced that of fellow G7 members Germany, France, Italy and Japan, according to IMF data. But it lagged behind the US and Canada, among many other industrialised economies.
Although first-quarter growth of 0.6 per cent in 2024 was the fastest since 2021, the economy is underperforming its pre-financial crisis and pre- pandemic trends. Brexit will knock 4 per cent off of its long-term performance, according to official estimates.
Goods and services
Britain underperforms other advanced economies in goods exports but outperforms in services, which make up 80 per cent of the domestic economy.
Globally, the value of British services exports is only second to that of the US and much larger than those of France and Germany.
The country has robust IT, financial and professional services sectors, and London is the second most important financial hub in the world after New York on measures including competitiveness, according to the latest Z/Yen Group’s global financial centres index.
Yael Selfin, chief economist at consultancy KPMG UK, said Britain had some “long enduring advantages”, such as the English language and Greenwich Mean Time, which meant the business day in London overlapped with financial markets around the world.
Growth in services has been supported by investment in artificial intelligence. The UK ranks third globally after the US and China for venture capital invested in AI and data start-ups, according to the OECD.
Employment and tertiary education
A solid education system supports the services sector: almost 60 per cent of Britons between the ages of 25 and 34 are educated to at least tertiary — or university or college — level, OECD data shows. That is the sixth highest among advanced economies.
Pupils in Britain perform better in reading, maths and science than peers in France, Germany or Italy, according to the Paris-based organisation. They also have access to 90 of the world’s top 1,500 universities, according to the annual QS World University Rankings, more than France and Germany combined.
However, UK universities have slipped in international rankings and the employment rate is increasingly lagging that of Germany, although it remains well above the OECD average.
This is partly because of a rise in UK workforce inactivity since the pandemic owing to long-term sickness. In Germany and the EU inactivity has fallen over the same period.
Productivity growth and business investment
The IMF, Bank of England and Office for Budget for Responsibility, the fiscal watchdog, all point to low investment and rates of productivity as among the British economy’s weaknesses.
Generous tax incentives have helped it rebound in the past two years, but business investment has underperformed historical trends and other countries since the Brexit vote.
UK productivity — defined as output per hour worked — has increased by just 6 per cent since mid-2008, according to official data. It has soared by 24 per cent over the same period in the US.
This has translated into weak wage expansion. In 2022, real pay in the US and OECD was 17 per cent and 10 per cent higher respectively than in 2007, according to OECD data. In Britain it was unchanged.
“Persistent under-investment in equipment and infrastructure relative to many other competitors” had harmed workers’ productivity and “thereby their wages”, said Sandra Horsfield, economist at Investec.
Living standards and public services
Low productivity growth has hit UK living standards: GDP per head rose by 6 per cent between 2007 and 2024, according to IMF data. The figure was well below growth of 42 per cent registered between 1990 and 2007, and 22 per cent growth in the US in the 17 years to 2024.
With UK investment as a percentage of GDP by far the lowest of the G7 at about 18 per cent, Britons have access to fewer hospital beds and dentists relative to the population than in most other big economies, according to OECD data.
Complex planning regulations and a lack of supply are also putting pressure on the property market.
UK housing costs relative to income are higher than in the past and compared with other countries. Rents rose by 13 per cent in the two years to May 2024 — the fastest pace in three decades and three times the rate in France and Germany.
Boosting economic growth will be key for the next prime minister to enhance living standards, increase investment and improve public services.
Paul Dales, economist at research company Capital Economics, said: “More investment in housing, infrastructure, education and health would help turn some of the weaknesses into strengths.”
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