You’ve probably completely forgotten that London was the world’s vibrant financial center in 2016… oh how times have changed.
Despite some glimmers of positive economic news in recent months, the UK economy really is now teetering on the brink of a recession, with even a nervous Rishi Sunak warning of its inevitability, at a time when his slim re-election hopes will surely be left in tatters if it cannot be avoided. However, this fall from grace cuts much deeper than a cyclical economic recession: Britain has lost its luster as a place major economies want to invest, where the world’s best talent wants to work, where the world’s business leaders even want to visit anymore.
Britain needs to convince the world it should take big bets again in its potential, as today, “Brand Britain” is circling the drain. Only a unified and focused government, real structural economic reforms, and smart investments can save this once-great economic powerhouse from decades of purgatory from which it may never recover its former glory.
UK is mired in deep-rooted economic, social, and political challenges
With the UK’s latest hike in interest rates squeezing whatever life was left in 2 million homeowners, rampant double-digit inflation that is barely flattening, some of Europe’s most costly energy costs, wave after wave of strikes impacting every corner of society, and a desperate shortage of low-income labor to keep the wheels of the economy and health service barely functioning. Britain has completely lost its economic mojo, with its economy 7% smaller than pre-COVID levels and a confused public wondering what happened to all the heady “benefits” of leaving the EU.
And while the latest reversal by the IMF indicates that the UK will no longer stand alone as the only advanced economy shrinking this year, its projected growth rate of 0.4% still raises concerns—much as the EU found out recently, it’s not impossible to slip into a technical recession, even with rose-tinted predictions.
The erratic nature of economic predictions has become a defining feature of the volatile early 2020s, taking over from the Great Stagnation that preceded it. In short, we’ve become used to chaos, and the ongoing assault on everything that used to seem stable is now the norm… from pandemics to rioting, from nuclear war to energy crises, and even the national water supplier about to go bust. In short, the UK faces deep-rooted economic, social, and political challenges.
The UK economy post-Brexit: Death by a thousand cuts
Several systemic challenges that foreshadow long-term economic troubles lie at the core of the UK’s problems. The most significant remains the persistently uncertain relationship with Europe after Brexit. Nine years have passed since the referendum, yet the UK government remains ill-prepared and arguably unfocused on the mounting political, logistical, financial, and economic obstacles that lie ahead.
For instance, some of the world’s largest car manufacturers recently warned the British government that they may need to renegotiate the Brexit deal to avoid factory closures and job losses. They highlighted the practical impact of the “rules of origin” outlined in the Trade and Cooperation Agreement (TCA) signed between London and Brussels in 2020. These rules entail imposing 10% tariffs on cars not meeting the specified percentage of components manufactured in the UK or EU. Leading automakers argue that this provision would render manufacturing electric vehicles in the UK economically unviable.
Vauxhall manufacturer, Stellantis expressed concerns about its ability to honor its commitment to producing electric vehicles in Britain without changes to the agreement. Ford referred to the rules as a “pointless cost,” while Jaguar Land Rover, the largest automotive employer in the UK, labeled the timing of the new regulations as “unrealistic.” (Despite this, JLR plans to launch a new battery factory in the UK, choosing somerset over Spain).
Such complaints from manufacturers are not new to the political landscape; in 2016, industry leaders warned that a poorly executed departure from the EU would result in a “death by a thousand cuts,” with the UK drowning in red tape and facing increased costs. Despite these prescient warnings and almost a decade to find solutions, the UK government has made relatively little progress.
Major capital investments from traditional economic and political partners are going elsewhere
The repercussions of the UK’s economic challenges extend beyond the automotive sector. Capital earmarked for the UK is now finding more welcoming homes elsewhere. Germany recorded its highest level of foreign direct investment last year, amounting to €25.3 billion—a staggering 261% increase from the €7 billion seen during the pandemic-hit 2021. The bulk of this investment comes from the US, as American companies seek to establish a presence in Europe while looking beyond the UK.
Apart from Brexit-related issues, a depleted financial arsenal has hampered the UK’s ability to compete with its economic counterparts. As a diminished economic power, it is ill-prepared to rival the generous cash incentives the US and EU offer. A telling example is the recent surge in support for domestic semiconductor industries, which have become a battleground between the US and China. The US and EU have dedicated war chests of $52 billion and $46 billion, respectively, to bolster and expand their domestic industries. In contrast, the UK has cobbled together a measly $1.2 billion.
But even this relatively modest sum, if properly allocated to areas where the UK possesses a competitive advantage (such as semiconductor design, intellectual property, compound semiconductors, and research and innovation), could be beneficial in helping the UK maintain a robust economic position. However, it highlights the diminished stature of the UK outside the EU and the limited leverage it possesses to compete with the generosity of other economic powers.
The power of the US and EU leaves an isolated Britain floundering
Indeed, the Inflation Reduction Act in the US is already turning heads in the UK. And the EU’s similarly compelling state aid rules are dialing up the pressure from the other side of the English Channel. According to a hydrogen- and battery-powered truck manufacturer, they can pocket an extra $113,000 more in subsidies for each truck they build in the EU, compared to the UK.
Similarly, the UK lithium industry is pushing the UK government to take action to strengthen the country’s supply chains in response to the US Inflation Reduction Act and the EU’s Critical Raw Materials Act (CRMA) and Net Zero Industries Act (NVIA). According to industry insiders, many battery producers plan to ditch the UK in favor of the US or EU unless they do something to make the current domestic environment more attractive. But it’s difficult to see how the UK can rustle up the funds to compete with the aid packages across the Atlantic or the Channel.
Securing more funding will come at a cost, given increasing interest rates. And with a debt-to-GDP ratio approaching 100%, there isn’t much room for maneuver. Indeed, the likely-soon-to-be-in-power Labour Party has already started to shrink its flagship £28bn green plan for fears of seeming out of touch with the economic realities of modern Britain.
Access to capital is becoming a broader issue, and UK capital markets have also taken a hit. One notable example is the snub by microchip giant Arm, which chose New York over London markets. Arm cited reputational damage from “Brexit Idiocy” and a shallower capital pool as reasons for bypassing the London Stock Exchange. This decision has dealt a significant blow to a country that once stood as a financial powerhouse, leaving the UK stock market trailing behind its French counterpart by $250 billion—a hit to pride as much as finance.
“Brand UK” as a place to work has taken a battering with employment levels below pre-pandemic levels
There’s also the small matter of a spiraling talent shortage. According to the ONS, there are currently 1.134 million unfilled vacancies across the UK economy, hampering productivity and ramping up pressure on wages—currently at the highest rates in the private sector outside of the pandemic. Employment group Manpower said the number of employers reporting skills shortages had increased six-fold over the last decade – and more than doubled since pre-Brexit and the pandemic.
The current government’s strategy—focused on unleashing untapped talent—is barely touching the sides, with the UK stuck as the only country in the developed world with employment still below its pre-pandemic level at the start of 2023. Years of creating a “hostile environment” for illegal immigrants and its umbrella message to those who want to arrive legally, combined with continued uncertainty for European workers following Brexit, will do little to woo workers back to the UK.
The Bottom-line: Turning the UK ship around is possible, but only with a precision three-point turn
However, despite the grim outlook, there is still hope for the UK to regain its footing in the global economy. To achieve this, the government must address three critical systemic challenges:
Firstly, UK political leaders must end internal discord and infighting, which have plagued the government since the Brexit referendum. Strong leadership, sound decision-making, and a commitment beyond political point-scoring are needed to unify and steer the country forward. “Brand Britain” has taken a battering, especially since the pandemic, and the world’s business leaders tend to avoid visiting the country anymore. Simply having a unified government and strong leadership will go a long way to fixing that.
Secondly, the UK must make bold and targeted investments. Instead of attempting to compete with larger economic rivals using inadequate funding, the UK must focus on sectors where the UK already has a competitive edge, and strategically deploy resources to secure a distinct advantage. Its leaders need to take big bold bets and encourage investors and workers alike that they are worth the risk and still have what it takes to come out on top.
Thirdly, the UK government must break free from Brexit’s lingering uncertainties. Empty promises and promotional marketing materials touting “Brexit benefits” will not solve the genuine concerns of businesses. The government should provide clarity, guidance, and structural support to address these concerns effectively. Over a decade has passed since the referendum, and it is high time for tangible structural changes that can restore stability and make the UK an attractive investment destination.