Why is the UK economy declining and becoming so unfavourable on the internatational stage?

The UK economy is struggling. Recession fears are mounting; political instability is peaking; and the cost of living is making our money less and less spendable. This makes the UK less favourable to invest in, making the economies’ long term growth looking ever duller. But why is our economy- known as one of the strongest in the world- faltering?

There are many individual reasons behind this problem, that compound to create a much larger one. These are some of the most prevalent ones:

The persistent uncertainty surrounding Brexit is one of the main worries. The conditions of the UK's future relationship with the EU are still being negotiated even after it departed the EU in January 2020. Due to their lack of stability around the future policies around European trade, firms are hesitant to invest in the UK. Businesses can be uncertain about the direction of laws and standards, or they might be uncertain about the future of trade with the EU. Because of this uncertainty, it can be challenging for firms to raise financing as well as to establish long-term planning.

The UK economy is becoming less appealing to investors due to the rising cost of living. A burden is being placed on businesses and consumers as a result of recent increases in the cost of housing, food, and energy. Due to this, it is becoming increasingly challenging for companies to turn a profit as well as for customers to afford purchases. Customers may have less money to spend on goods and services while businesses may have to pay greater rent or energy costs. Businesses thus both have less clients & customers, and have higher operation fees, making profits even smaller. As a result, demand may decline, tax revenue from profits will be smaller, and businesses will not look to expand into the UK as much, which would be bad for the economy as a whole.

The productivity levels in the UK present another difficulty. How much is generated in an hour of work is known as productivity. Major economies like USA, France and Germany have productivity levels roughly 17% larger than the UK, and overall levels have only grown around 0.6% a year since 2010. Since UK productivity levels have not meet expectations over the past several years, the UK economy is not expanding as swiftly as it could.

The UK’s internal instability around domestic affairs also makes long term growth look unfeasible in investors’ minds. The UK is in a political frenzy- 2 new prime ministers have been appointed in the last 6 months. The tussle between opposition parties (Conservative and Labour) has grown even more. National services, like the NHS and state education, has fallen under dire underfunding, and the infrastructure as a whole looks weak. This all makes the UK look unsteady as an economy, which has scared away businesses and investors regarding such volatility for a country of such standard.

The UK’s strict compliance and regulatory climate also makes business and trade very limited, which hampers economic growth potential. The UK has very stringent tax laws, and ethics plays a major part in business operations, making many companies unwilling to grow and move to UK for business. The London Stock Exchange is a prime example: due to the LSE’s strict entry requirements, higher fees and less lenient valuations of companies, less firms are listing here, which means the UK is losing out on a lot of revenue from businesses who list in the UK instead. This makes the UK less favourable against regions such as the US and Middle East, who have much better firm listing projections and thus much better growth potential.

The UK government is taking action to address the economic difficulties it is aware of. In order to increase productivity and growth, the government has promised to invest in infrastructure, education, and skills. In an effort to lessen uncertainty and increase trade, the government is also attempting to reach a new trade agreement with the EU, and has relaxed many of its compliance and stock listing policies. However, the UK’s dismal economic potential still makes it unfavourable among global investors, meaning the economy still has a long way to go to turn itself back around.

By Srijan Deb