Even though I try to look on the bright side, I find it hard to describe the outlook for the UK economy as anything but mediocre. Rather than striding confidently into 2026, we will be tiptoeing warily. This, sadly, is not unusual. It has been the norm now for more than a decade and a half.
It was not always this way. The nasty recession of the early 1980s, Margaret Thatcher’s first, which wiped out much of manufacturing, was followed by strong growth — which eventually was too strong — and a productivity boom. The economy that emerged was very different from the one that went into the recession.
Similarly, the recession of the early 1990s, which had just started when Thatcher was deposed, saw a house-price crash and was particularly hard on small and medium-sized firms, many of which went to the wall. It was followed, however, by the longest period of economic growth in UK history, 63 consecutive quarters or almost 16 years. UK per capita GDP, in real terms, rose by 47 per cent during that recovery. It has risen by a mere 6.6 per cent since, little better than prolonged stagnation. No wonder we feel glum.
Both those recession episodes involved creative destruction, the term invented by the great economist Joseph Schumpeter. This process of “out with the old, in with the new” is not confined to recessions, and does not have to be, but they traditionally provide the spur for taking out the weak and obsolete, and replacing them with the modern and productive.
Now think of the last two recessions that we have had in the UK. The first, 2008-9, saw the banks rescued by the government, which had to be done to prevent a bigger economic disaster. And, while I would not say that their subsequent conduct was angelic, in this context there never could have been a repeat of the harshness of the early 1990s. “Extend and pretend” became the norm, and the new and exciting businesses that we hoped would emerge like phoenixes from the ashes were held back by a lack of funding.
During Covid, massive government interventions, including the furlough scheme and Covid loans, could have been designed to preserve the existing economic structure in aspic. Furlough meant that employees stayed on firms’ books, in contrast to the support provided direct to households in other countries such as America, which emerged stronger from the pandemic. We, instead, created a corporate dependency culture, which persists.
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The cost of these interventions, in £11 billion of fraud, is being revealed by the fraud commissioner this week. The wider cost to the economy, in stifling necessary adjustment, is greater.
And so it goes on. Businesses expect governments to intervene to help them through difficult times, as do households, and say the state is failing when it does not do so. Whether it is wise to keep uneconomic parts of the economy going, it is done — for political reasons.
Covid interventions were successful in preventing a massive increase in unemployment and company failures because of the deepest recession for 300 years. But they also kept a lid on creative destruction.
The result was that the economy emerged weaker from both these recessions. There was a brief flowering of growth after the financial crisis, when the economy grew by more than 3 per cent in 2014, but it did not last, for well-known reasons. The economy recovered the ground lost in the pandemic in 2021 and 2022 but then torpor took over, with 0.3 per cent growth in 2023, 1.1 per cent in 2024 and an expected 1.5 per cent this year.
To adapt the phrase associated with Barack Obama’s one-time aide Rahm Emanuel, but which appears to date back to Winston Churchill, these crises were allowed to go to waste. Remember all that stuff about “building back better” after the pandemic?
This is not just supposition. We know that both of those crises were followed by weak growth, which persists. We really notice the difference when the annual growth figure has a “2” in front of it, and even more so with a “3” or a “4”. Such numbers were the norm after the early 1980s’ recession, and in the long upturn of the 1990s and 2000s. But the latest official forecast is for a string of growth numbers beginning with “1”.
The Office for National Statistics (ONS) has a way of measuring this, as well as the growth numbers, and has just updated it. It has a measure called “business dynamism”.
As it puts it, this “can be measured as the rate at which jobs are created and destroyed. Jobs are created by existing businesses (incumbents) growing and by new businesses entering the market. Jobs are destroyed by incumbents shrinking or exiting the market. Business dynamism can support productivity growth if entering and growing businesses have higher productivity than shrinking and exiting businesses.”
What it calls the reallocation rate, which sums job creation and destruction as a proportion of employment, dropped below 20 per cent last year, and for the past 15 years has been significantly lower than in the period before the financial crisis. In 2001, for example, it was over 30 per cent. Business dynamism was higher. More businesses were being established and more leaving the field.
Today we have job destruction, particularly in sectors like hospitality, hit hard by an array of higher taxes, and this takes out good firms as well as bad ones.
We also have dynamic businesses, but probably not enough of them. Another finding of the latest ONS research is that firms at the 90th percentile for productivity generate 3.5 times the gross value added per worker as those in the middle of the distribution, and 21 times those at the 10th percentile.
We need more of those growth, productivity and employment drivers and fewer of the also-rans. High productivity firms tend to create jobs not reduce them. We need more creative destruction, and less government intervention.