Four supply-side shocks that are working in parallel to dampen UK economic growth
Written by John Bryson FAcSS, Professor of Enterprise and Economic Geography at the University of Birmingham, UK on 15 November 2024
The life of the academic is very varied. We research, write, teach, advise, create multiple societal impacts, and provide media commentary. Today was no exception.
It started at 4.30am as I needed to catch a train at 5.46am to meet a BBC crew that were filming a live broadcast for BBC Breakfast, and other BBC programmes.
This feature was linked to the release of the quarterly GDP figures for the third quarter of 2024 (July to September). During this period, the UK economy grew by an estimated 0.1 per cent compared to 0.5 per cent between April and June 2024. Growth was weaker than expected.
The context is that the Labour Government’s top priority is to boost economic growth and yet the indication seems to suggest that growth is slowing.
This slowdown is related to many things including the wet summer, but also uncertainty related to leaks and speculation regarding the October budget.
This morning, part of the BBC Breakfast programme was broadcast live from Frederick Cooper (Birmingham) Ltd.
This company is an extremely innovative and well-managed coatings application provider, or in other words it provides all types of wet and dry finishes for a variety of industries including automotive, engineering, drinks (dispensing), industrial and medical. This company works with incredibly famous brands.
Visiting a company always comes with a sense of awe. These are the job creators, or job markers, which create the wealth that is then taxed to support public service provision. Anything that negatively impacts on these firms dampens economic growth and has the potential to destroy jobs.
A company visit highlights the interdependent nature of the many possible shocks that a company experiences. One of my recent research contributions focusses on what I term shock and recovery chains, and shocks and recovery processes that work in parallel.
Too often, politicians, academics and journalists focus on a single risk or shock and yet no risk or shock occurs in isolation.
A company must adapt to multiple parallel shocks. Complex negative feedback loops form between these shocks.
Government policy must work to reduce the number of shocks that are experienced in parallel by companies like Frederick Cooper.
Currently, all UK companies are adapting to a major supply-side shock and must cope with three risks that will become future supply-side shocks. A risk is the possibility of a shock occurring.
Combined all UK businesses are facing four new shocks that will work in parallel and will dampen economic growth. These four shocks are additional to other on-going shocks.
The first supply side shock is the October 2024 budget. This budget targeted all private sector businesses and social enterprises.
The outcome is a major increase in these firm’s overheads.
This increase in supply-side taxation will reduce corporate investment but will force some firms to close and other to reduce employee numbers. All these company adaptations will have a domino effect on tax revenue.
The second supply-side shock comes from alterations to workers’ rights.
These will add additional complexity, expense, and risk to all employers. Employers are already anticipating the impacts of these alterations and adapting.
Adaptations include reducing headcount, automation, and offshoring tasks to outside the UK. This shock by itself is containable by businesses but remember that this is only one of many shocks that are working in parallel.
The third supply-side shock comes from the election of Donald Trump as the 47th President of the United States.
Trump is extremely focused on economic growth. Both the first and second shock will result in cost pressures on UK firms which, without adaptation, makes them less competitiveness.
However, the shock that is to come is related to the tariffs that Donald Trump is likely to apply to UK exports to the US.
Currently, there is a major trade imbalance between the UK and the US. The US is the UK’s largest trading partner. In 2024, UK exports to the US amounted to £188.2 billion whilst UK imports from the US amounted to £116.1 billion.
Trump will be very aware of this imbalance and may apply policy that will alter these flows. This will dampen demand for UK imports to the US.
Alternatively, the UK government needs to negotiate aggressively with the EU. EU member states export goods and services to the UK valued at £356 billion. However, imports from EU members states to the UK came to £466 billion. The UK has a major trade deficit with the EU and this needs to be rebalanced.
The fourth supply-side shock comes from the UK government’s new target that was announced at COP29 to cut annual greenhouse gas emissions by 81 per cent versus 1990 levels by 2035.
Under the Paris climate agreement, the UK needs to reduce emissions by 68 per cent by 2030 compared with 1990s levels. There are multiple shocks here.
The UK now has an extremely ambitious target, but all countries must adopt the same target. Any country differences will distort international trade providing unfair advantages.
For the UK this is another supply-side shock as it increases the costs of providing goods and services. Meeting this target, requires revolutionary changes for producers and consumers and to a short timescale.
Anyone of these shocks will dampen economic growth and has the potential to destroy jobs and reduce the tax take that comes from taxing companies and their employees.
Combined these four parallel shocks represent a major challenge for all UK organisations.
This requires significant management effort. The likely outcome is that job creation will be constrained, and the UK economy will fail to grow at the level needed to provide the tax take required to support public service provision.
The UK government needs to be much more aware of the negative impacts of parallel shocks on economic activity and must seek to remove some of these shocks.
