Boris vs. business: five charts show UK economic reality
(Bloomberg) – Boris Johnson’s optimistic vision for the post-Brexit economy in the UK is challenged by big business and some traditional supporters of the ruling Conservative Party.
The prime minister said Britain was witnessing a rise in wages and no longer relying on mass immigration. That, in turn, he hopes, will reverse the malaise the UK has suffered for years as a slow growing, low productivity economy.
While his remarks this week garnered adulation from loyal Conservatives, they ended up badly outside the room where worker shortages have left consumers and businesses struggling for essential supplies.
“Economically illiterate” was the conclusion of the Adam Smith Institute, a research group generally in favor of conservative free market policies. The Confederation of British Industry has warned of the risks of putting ambition before action.
Here’s a quick assessment of some of Johnson’s economic arguments:
“After years of stagnation – more than a decade – wages are rising faster than before the pandemic,” Johnson said in a speech Wednesday at the Conservative Party’s annual conference.
While Johnson is correct that wage growth is accelerating, this is largely due to the labor shortages created by the pandemic. If companies are unable to absorb higher payrolls or increase their productivity, the result will be higher prices for everyone. It also ignores the fact that inflation is 3.2% and is expected to exceed 4% by the end of the year. This would in effect eat up the increase in salary.
“We are now embarking on a long overdue change of direction in the UK economy. We are not going back to the same old broken model with low wages, low growth, low skills and low productivity, all enabled and assisted by uncontrolled immigration, ”Johnson said in his conference speech.
The Prime Minister is right to point out the UK’s stagnant productivity as a problem, but immigration may not be the cause. Countries like Germany and France also have high immigration levels but have more productive economies. This suggests that it is possible to increase productivity while allowing low-skilled migrants to enter the country.
“We will make this country an even more attractive destination for foreign direct investment,” Johnson said. “We are already number one.”
It is true that the UK has historically dominated FDI inflows to Europe, but its position is slipping. Data from the Organization for Economic Co-operation and Development shows that, in fact, Germany was the number one destination for foreign direct investment in 2019, the last year before the pandemic, after following the UK in the five previous years.
Johnson also argued that companies have relied too much on a plentiful supply of foreign workers rather than investing in productivity-enhancing technology and equipment. But before the Brexit referendum in 2016, overall business investment was actually increasing by more than 5% per year. It has been largely flat since.
Johnson is correct in identifying productivity as the main underlying weakness in the economy. On the eve of the pandemic, hourly production was only 5% higher than it was when the financial crisis hit 12 years earlier. Low productivity hinders the ability of companies to raise wages and limits how quickly the economy can grow without triggering faster inflation.
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