Context: Productivity and International Competitiveness

Extract D: Current Account Balance and Productivity Index

Table 1: Current account balance as a percentage of GDP, 2016 to 2022

Table 2: UK Labour productivity index (Output per hour worked, 2015 = 100)

Extract E: The structural trade deficit

The UK has ran a persistent structural current account deficit for several decades, driven heavily by a substantial deficit on the trade in goods. Although this has traditionally been offset by a surplus in services, the reliance on foreign capital inflows to balance the financial account remains a vulnerability. Some structural economists argue that the root cause of this imbalance is a long-term 'productivity puzzle', where productivity growth has persistently lagged behind major trading partners since the 2008 financial crisis.

Without strong growth in output per hour, domestic industries struggle to maintain cost competitiveness. When domestic demand expands, it frequently leaks out into imports because local firms lack the capacity or the price advantage to compete with foreign manufacturers. While a depreciation of the currency would theoretically make domestic exports cheaper, it also raises the cost of essential imported raw materials and components, which can feed directly into domestic inflation.

Extract F: Supply-side solutions

To achieve a sustainable rebalancing of the economy away from consuming imports and towards exporting, structural reforms must be prioritized. Raising investment in capital equipment, enhancing workforce skills, and investing in research and development (&D) are critical strategies to address these core issues.

Ultimately, the persistent deficit on the current account will only be sustainably reduced if supply-side policies succeed in raising labour productivity, thereby lowering unit labour costs and improving the international price and non-price competitiveness of domestic firms.