Britain's Economic Growth Has Been Flattered By A Booming Population - But Rising Productivity Holds Key To Stronger Growth In The Next Parliament

10th June 2024

The UK's middle-of-the-pack record on economic growth since 2010 has been flattered by the population growing by six million people. But Britain will need to turnaround its dire productivity record and leverage its services strengths if it wants raise growth and boost living standards in the 2020s, according to new research published on Sunday 9 June 2024 by the Resolution Foundation.

Life in the Slow Lane - the latest Resolution Foundation election briefing, funded by the Nuffield Foundation - examines the UK's track record on the key economic metrics of growth, productivity and trade since 2010, how the country's performance has evolved over this period, and how it needs to change in the next parliament.

The Chancellor has been keen to highlight the most recent GDP data for early 2024, which was the strongest in the G7, while the Shadow Chancellor has been highlighting the record over the parliament as a whole, in which GDP per capita has fallen by 1.2 per cent.

But looking at the UK's overall record on economic growth since 2010, the report notes that its relative performance has been middle-of-the-pack. Compared to other G7 economies, the UK has grown faster than Germany, France, Italy and Japan, slower than the US and Canada, and is about average across the OECD.

However, this solid if unspectacular performance on GDP has been flattered by a booming population, which has grown by 0.7 per cent a year since 2010, equivalent to six million more people. This is the fastest population growth the UK has seen for a century, with three-quarters of it accounted for by migration.

Looking at GDP per capita, which accounts for population growth, the UK's overall and relative performance is far worse. GDP per capita has grown by a mere 4.3 per cent over the past 16 years in total, compared to 46 per cent in the 16 years prior to this.

Growth in the 2010s was largely driven by an employment boom (peaking at 76.1 per cent in Q4 2019) which has since turned to bust (now 74.5 per cent in Q1 2024), exposing the UK's poor record on productivity - the ultimate driver of rising living standards.

In the 2010s, productivity (output per worker) grew by just 0.6 per cent a year - less than a third of the rate enjoyed in the decade running up to the financial crisis (2.2 per cent) - and the second worst performance in the G7 after Italy. Productivity growth since the financial crisis has been the slowest for two centuries.

And while the UK's longstanding productivity woes are now also being experienced by other advanced economies such as France and Germany, Britain has found new areas of economic exceptionalism on trade - for good and for ill.

The report finds that, since 2019, the UK has cemented its role as the world's second biggest exporter of services after the US, with services exports growing by 7.8 per cent a year, compared to an OECD average of just 5.4 per cent. This is especially encouraging given the global trade in services is forecast to grow faster than goods in the coming decade, and the UK is well placed to capitalise on this trade tailwind.

Far less welcome, however, has been its weak performance on goods trade. The UK has failed to capitalise on the post-pandemic boom in goods trade - losing market share in the goods that it sells to other countries - and seeing goods exports grow by just 1.1 per cent a year, compared to 5.3 per cent across the OECD.

Looking ahead to what might drive future economic growth, the report says that the employment boom that boosted growth in the 2010s is unlikely to be repeated. Migration levels are expected to fall, from 685,000 in 2023 to around 350,000 annually over the next five years, while an unhealthy population and UK’s large baby boomer cohort retiring will put further downward pressure on the future growth of the workforce.

Instead, future economic growth will need to come from the UK addressing its long-standing weakness on productivity, and leveraging its long-standing strengths in services.

Greg Thwaites, Research Director at the Resolution Foundation, said, "The economy is at the centre of the election campaign, and the UK’s economic record is bang average when it comes to GDP growth. But beneath this ‘middle-of-the-pack’ position lies some major strengths and weaknesses that hold the key to the UK’s future economic performance.

"Britain’s middling growth record has been propped up by a booming population. The extra six million people in Britain have certainly made the economy bigger, but has done little for GDP per capita. In fact, the UK’s record on productivity – which is what really matters for living standards – is exceptionally bad.

"There is widespread consensus on the need to turnaround the UK’s productivity record, which is far easier to talk about than deliver. But if the next government is looking for encouragement, it should seek to build on Britain’s already booming services exports, which could really go gangbusters over the coming decade."

Key findings
Real GDP grew by an average of 1.5 per cent per year between 2010 and 2023, putting us third in the G7, behind the US and Canada but ahead of France, Germany, Italy and Japan, and roughly at the median among a wider group of high-income OECD countries.

But our growing population flatters the UK’s performance. The population grew by 0.7 per cent per year between 2010 and 2023, equivalent to 6 million more people. This was the fastest rate of population growth for a century, and three-quarters of it was driven by migration, with the 0.5 percentage point contribution, the biggest in any 20 year period on record.

During the 2010s, the UK experienced an employment boom. Hours worked per person rose by almost 8 per cent over that decade, second only in the G7 to the US. This offset exceptionally weak productivity growth averaging 0.6 per cent per year in the 2010s, compared to 2.2 per cent in the decade leading up to the financial crisis, slower than every country in the G7 bar Italy. The weakness in UK productivity is pervasive across the economy, and due in part to low investment.

The employment boom has turned to bust in the 2020s, such that real UK GDP per person actually fell by a cumulative 1.2 per cent between Q4 2019 and Q1 2024.

Since 2019, the UK has cemented its role as the world’s second biggest exporter of services, with services exports growing by 7.8 per cent a year, compared to an OECD average of just 5.4 per cent. Less welcome, however, has been its performance on goods trade, where the UK has lost market share in the goods that it sells to other countries –seeing goods trade grow by just 1.1 per cent a year, compared to 5.3 per cent across the OECD.

Read the full report HERE
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