U.K. Election Winners Will Find Reviving Economy No Easy Task

(Bloomberg) --

Whoever wins this week’s U.K. election will take over an economy that’s far from full strength, and turning it around will require more than just ramping up spending.

Both the ruling Conservative and the opposition Labour Party leaders have promised to end a decade of austerity. They’ll also be charged with rewriting the rules governing the U.K.’s relationship with its biggest trading partner if they take the country out of the European Union. Here’s the backdrop facing whoever takes charge at 10 Downing Street:

Growth

The U.K.’s output has been hobbled since the 2016 referendum as businesses cut back on investment. Consumer spending has at least been a strong point and helped the U.K. avoid a recession before the ultimately delayed Oct. 31 deadline for leaving the EU. Signs of a turn in the labor market have raised questions as to how long that resilience can last, however.

What Our Economists Say:

“A scenario where the Conservative Party falls just short of a majority is probably the worst result for the economy in the near term. It would leave the U.K. stuck in limbo and growth anemic.

-- Dan Hanson, Jamie Rush, and Niraj Shah, Bloomberg Economics

Investment

Businesses reduced spending for four quarters in a row in 2018, the longest continuous decline since the financial crisis, and the performance hasn’t improved much since. Changing Brexit deadlines and a lack of clarity over the future relationship with the EU have pushed companies to put off investment decisions.

Labor Market

While high employment figures have been a bright spot for the economy over the last few years, there are signs that Brexit uncertainty is finally hitting the labor market. The economy lost jobs in the third quarter of the year and vacancies posted their largest annual decline since the financial crisis. Signs that the labor market is turning were cited by two Bank of England policy makers as a reason for wanting to cut interest rates in November.

Still, unemployment remains at near-record lows, and the Resolution Foundation, a research group, says that living standards are on the cusp of returning to their pre-crisis levels. Low-paid workers in sectors such as retail and hospitality have benefited from big increases in the minimum wage, though Britons could be much better off had pay continued to grow at its historical average.

Migration

Migration to the U.K. from the EU has plunged to the lowest since 2003 after the Brexit vote, even with no formal changes to immigration policy yet. Fewer workers are bad news for companies ranging from construction to healthcare providers who already face skills shortages and have relied on EU citizens to plug the gaps for years.

Productivity

One of the biggest problems facing Britain’s economy is its dismal productivity performance. Hourly output has grown by around 0.5% a year on average since the financial crisis ended compared with over 2% in the decade before it began. Leaving the EU may worsen the issue as Britain could be deprived of productivity-enhancing innovation and investment. Time spent preparing for Brexit may also be having a negative impact already, according to research.

Fiscal Expansion

Government spending is heading for a return to levels not seen for decades regardless of who triumphs in the election. Still, the size of the state will vary significantly depending on which party ends up in power. The Conservatives plan to increase day-to-day spending by just 3 billion pounds ($3.9 billion) a year by the end of the next Parliament in 2024, and add 20 billion pounds to capital investment. Labour, by contrast, is proposing an 83 billion-pound boost for public services and 55 billion pounds more for investment.

To contact the reporters on this story: Jill Ward in London at jward98@bloomberg.net;Andrew Atkinson in London at a.atkinson@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, David Goodman

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