Bloomberg / London
Theresa May’s economic legacy is dominated by the same thing that consumed her turbulent premiership: getting Britain out of the European Union.
On many metrics, the economy is indistinguishable from the one inherited from David Cameron. Productivity growth remains abysmal, austerity continues, homes are largely unaffordable for first-time buyers and deep divisions persist. That’s despite May’s pledge in her very first statement as prime minister in July 2016 to tackle “burning injustices,” words she reiterated yesterday as she bowed to pressure and announced plans to resign on June 7.
Though the Brexit recession predicted by some economists back in 2016 never materialized, and the economy kept growing, there are scars, notably the weakness of investment. Better was job creation, which has boomed, and wages are once again rising more quickly than prices.
As May prepares to step down after almost three years in office, here’s the state of Britain today.
The referendum delivered an initial shock to living standards by driving down the pound and pushing up import prices; now business investment is under pressure and export prospects are weakening, leaving Britain heavily dependent on consumers. But households have little left in the tank. They saved just 4.2% of their income last year, less than half the rate of 2015.
The economy is widely estimated to be around 2% smaller than it would be had Britain voted to stay in the EU. Since the second quarter of 2016, US GDP has increased 7.3% and the euro area by 5.5%. Britain has lagged behind at 4.8%.
The labour market has been the standout performer. The number of people in work has risen by almost 1mn since May took office, taking the jobless rate to the lowest since the mid-1970s. Almost all of the growth has come from full-time employee jobs. One theory is that firms are choosing labour over capital investment because hiring is easier to reverse if the economy turns sour.
Pay growth is picking up too, though real wages aren’t expected to recover their pre-recession levels until 2023.
Record employment is good news for living standards but British workers are barely more productive than they were before the financial crisis. Output per hour grew just 0.5% last year, extending a long-running malaise.
That’s depressed wages and restricted how quickly the economy can grow without generating inflation. Hourly output would be a fifth higher today had it followed its pre-crisis trend. Brexit could exacerbate the problem by depriving the economy of productivity-enhancing foreign innovation, skills and investment.
May interpreted the Brexit vote, and a calamitous general election a year later, as a backlash against years of austerity. The government responded by cutting income taxes, freezing fuel duties, hiking the minimum wage and easing the clampdown on public-sector pay and health spending. But the premier faced fierce criticism for pressing ahead with huge welfare cuts enacted by her predecessor.
A four-year freeze on working-age benefits boosted the public finances, but it’s taken a brutal toll on the poorest families. The policy is expected to leave couples with children in the lowest fifth of the income distribution around £900 ($1,150) worse off in 2019-20, with other welfare changes delivering further cuts in the next few years.
In 2017, a deadly tower-block fire in the London district of Kensington and Chelsea became a symbol of division. Incomes in the area around Grenfell Tower are among the lowest in Britain. Just across the borough, they are the highest.
In Knightsbridge, home to Harrods department store and multi-million-pound properties, a man can expect to live to 94, whereas male life expectancy around Grenfell is just 72, according to local lawmaker Emma Dent Coad. May herself was accused of showing indifference by refusing to meet residents when she visited the scene of the disaster.
Inequality across the country possibly widened further last year. Earnings for the top 0.1% surged by almost 6% between April and September, compared with 3.7% on average, according to the Office for Budget Responsibility.
The financial crisis opened up a generational divide, and there is little sign that the gap has narrowed under May. Disposable incomes for millennials at age 30 are barely higher than they were for the generation before them at the same age. In the housing market, years of soaring prices mean owning a home is beyond the reach of many young people.
A full-time worker could expect to pay almost eight times their annual earnings to purchase a home last year; in London, the ratio has soared to more than 12, requiring first-time buyers to raise more than 100,000 pounds on average merely to fund a deposit. The key to fixing the crisis lies in homebuilding rather than more government initiatives to help people onto the housing ladder, economists say.
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