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U.K. Election Promises Biggest Economic Shakeup in Decades 

Boris Johnson’s Conservatives want to implement a Brexit deal that they say will open a golden era of free trade.

U.K. Election Promises Biggest Economic Shakeup in Decades 
A British Union flag, also known as a Union Jack, flies from a tourist souvenir stall on the bank of the River Thames in view of the Houses of Parliament in London, U.K.(Photographer: Luke MacGregor/Bloomberg)

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The U.K.’s main political parties are going into their third election in five years promising the most-radical shakeup in the nation’s economy in decades.

Boris Johnson’s Conservatives want to implement a Brexit deal that they say will open a golden era of free trade and self-regulation, but which economists say could leave the economy a substantial 3.5% smaller in the long-run. That’s compared with staying in the European Union -- one possible outcome of Labour’s policy of holding a second referendum.

U.K. Election Promises Biggest Economic Shakeup in Decades 

On the other hand, Labour leader Jeremy Corbyn favors an extensive nationalization program that the Confederation of British Industry warns could cost almost 200 billion pounds ($259 billion).

With so much at stake, here’s a look at the health of the U.K. economy going into the vote:

Growth

The U.K. is entering the election with one of the worst growth backdrops in years. The pace of expansion has slowed amid Brexit turmoil, with the 2%-plus growth rate from before the referendum replaced with one of 1.9% in 2016 and 2017, 1.4% in 2018, and a predicted 1.2% this year. In the second quarter, the economy actually shrank for the first time since 2012, partly as a result of companies unwinding stockpiling they implemented ahead of the original Brexit deadline in March.

U.K. Election Promises Biggest Economic Shakeup in Decades 

Still, a rebound later in the summer means that, barring a collapse in growth in September, the U.K. looks likely to have a dodged a second quarter of contraction that would leave it in recession. That will be confirmed by data on Nov. 11, a report which could nevertheless be seized on by all sides as a way of advancing their campaign message.

In any case, the International Monetary Fund says the U.K. has one of the gloomiest outlooks in the world for next year. That’s against a backdrop of overall global growth cooling and the U.S.-China trade war threatening to make things worse.

U.K. Election Promises Biggest Economic Shakeup in Decades 

Consumer Confidence

A major reason for the slowdown is the drying up of investment as rolling Brexit uncertainty makes it impossible for firms to make plans. That’s left consumers as the major driver of economic growth.

But even they are showing signs of stress. Confidence slumped to match a six-year low this month, as Britons became less optimistic about their personal finances, according to GfK. Meanwhile the housing market, another key supporter of sentiment, is also trapped in a Brexit malaise, with prices falling outright in London.

U.K. Election Promises Biggest Economic Shakeup in Decades 

Labor Market

One definite bright spot for consumers over the past few years is the labor market. The U.K.’s unemployment rate is hovering close to the lowest level since the 1970s, and wage growth is running well ahead of inflation, having broken out of years of stagnation to reach the fastest since 2008.

U.K. Election Promises Biggest Economic Shakeup in Decades 

The picture is not all rosy, however. Pay growth has been so anemic in the past decade that real earnings are still below their pre-crisis levels, while recent data has also suggested the labor market may be beginning to turn. Employment fell over the summer for the first time in two years.

Public Finances

U.K. Election Promises Biggest Economic Shakeup in Decades 

The age of austerity in Britain is over, whoever wins the election. Corbyn says Labour will borrow to fund a 250 billion-pound investment program. Johnson is vying to outdo his rival when it comes to spending on front-line public services and is promising billions of pounds of income-tax cuts plus a major boost for infrastructure.

There is now almost no chance that Britain will meet fiscal rules requiring the structural budget deficit to be below 2% of GDP in 2020-21. Chancellor Sajid Javid’s room for maneuver was cut in half by a huge spending increase announced in September. Furthermore, student loans that will never be repaid are now added to government spending and recording errors mean the Treasury has been collecting less tax from company profits than previously thought.

The risks to the public finances will be highlighted when the Office for Budget Responsibility, Britain’s fiscal watchdog, publishes forecasts updated for these technical changes on Nov. 7.

U.K. Election Promises Biggest Economic Shakeup in Decades 

Long-Term Trends

While Brexit has been blamed for much of the U.K.’s ills in recent years, one of its biggest problems is a far longer-term issue. Britain’s dismal productivity performance means that hourly output has grown by just 0.4% a year on average since the financial crisis compared with 2% in the previous decade.

U.K. Election Promises Biggest Economic Shakeup in Decades 

--With assistance from Zoe Schneeweiss and Andrew Atkinson.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net;Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Fergal O'Brien

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