What will the UK’s stagnating economic growth mean for politics?

The public mood will be still more depressed if the Bank of England does as it has been hinting it might and starts to push interest rates up, writes Sean O’Grady, but for the government the real risk is inflation

Money is getting tighter, since even those who see their wages rising are caught by higher rises in the cost of living (PA)

You can’t get the staff, as the old quip goes, and it happens to be a goodly part of the explanation for the UK’s sluggish recovery from the Covid pandemic (which is, of course, not exactly “over” in any case). With the notable exception of the United States, most major economies have not yet recovered the level of output they were at when the coronavirus struck, and, it has to be said, the UK is further away from that benchmark than its closest neighbours – 2.1 per cent off the levels of early 2020, as compared with France and Germany, lower by 0.1 per cent and 1.5 per cent respectively. Some of the difference is down to slightly different methods of accounting for growth, and the different composition of the UK economy, being more reliant on service industries (though in fact that could be working this time in favour of the UK).

In any case, growth is slowing down, and is below expectations. Common sense tells us us to look for a possible explanation as to why the UK has been falling behind of late. It is at least possible that Brexit has had a depressing effect on economic activity, with EU workers returning home and increased barriers to trade and the flow of orders, componentry and raw materials. Extra bureaucracy will also impose higher costs, and so on. That, in turn threatens higher inflation and, in time, higher interest rates. What will this mean for politics?

It will certainly add to pressures on the public finances, though the effects will take time to feed through. Taxes and public borrowing will be higher, and public spending lower than they would probably be with higher growth. There’s no immediate shock, but in the coming years hopes that the Conservatives can retain their ratings for economic competence in the face of an intensifying cost of living crisis seems unlikely. The two big unknowns are what will happen to unemployment in an era of labour shortages, and to prices, but again the outlook is poorer than might have been hoped before. Pre-election tax cuts will be harder to engineer, and there’ll be less investment in pet politically targeted “levelling up” projects in marginal seats.