UK recession could turn into a ‘lost decade’

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The United Kingdom faces a “lost decade” of growth if action isn’t taken to address slumping business investment and worker shortages, a leading business lobby group has warned.

In a bleak economic forecast published on Monday, the Confederation of British Industry (CBI) said that three quarters of companies are struggling to find the skills and workers they need. It urged changes in government policy, including a more flexible immigration system and tax breaks to boost investment.

“Britain is in stagflation — with rocketing inflation, negative growth, falling productivity and business investment. Firms see potential growth opportunities but a lack of ‘reasons to believe’ in the face of headwinds are causing them to pause investing in 2023,” CBI director general Tony Danker said in a statement.

“We will see a lost decade of growth if action isn’t taken. GDP is a simple multiplier of two factors: people and their productivity. But we don’t have people we need, nor the productivity,” Danker added.

The United Kingdom is the only G7 economy that still hasn’t recovered fully from the pandemic. Soaring energy and food costs drove inflation to a 41-year high in October. Widespread strikes have become the norm in recent months as workers feel the sting of a worsening cost-of-living crisis.

UK workers suffered the biggest drop in their spending power in more than 20 years between April and June as average real wages — which take inflation into account — fell by 3%. The drop in real wages was less severe in the third quarter but was still one of the largest since official records began in 2001.

In a sign of how disruptive strike action has become, Conservative Party chairman Nadim Zahawi said Sunday that the government is looking at bringing in the military to keep public services running.

The outlook for the UK economy next year is among the weakest of the advanced nations covered by the CBI forecast, with only German GDP set to fall at a slightly faster pace. Germany has felt the full force of the energy crisis unleashed by Russia’s invasion of Ukraine.

The CBI expects the UK economy to shrink by 0.4% in 2023 — a significant downgrade from the growth of 1% it predicted in June. The economy is forecast to recover to its pre-Covid size only in the second quarter of 2024.

Inflation should fall gradually over the coming year, but it will remain significantly above the Bank of England’s 2% target over 2023 and lead to a year-long decline in consumer spending, the CBI forecast.

The group expects business investment to fall from the middle of next year, leaving it 9% below its pre-pandemic level at the end of 2024. Output per worker is expected to remain 2% below its “already weak” pre-Covid trend by that time, the CBI said.

“While it’s some consolation that the upcoming recession will be shallow, it’s concerning that longer-term weakness in productivity and business investment appears to be bedding in,” the CBI’s lead economist, Alpesh Paleja, said in a statement. “It does not bode well for living standards and the economy’s capacity to grow over the longer-term.”

The group said the government should address investment shortfalls with permanent tax incentives, which it estimates will unlock an extra ?50 billion ($61.4 billion) in capital investment per year by the end of the decade.

“We cannot afford to have another decade where both [investment and productivity] are stagnant,” Danker said.