Figure 1: Components of aggregate demand in selected countries, 2022

Figure 2: Labor Productivity (GDP per hour worked), Index 2015 = 100

Extract A: The UK's productivity and trade challenge

Following the economic disruptions of the early 2020s, the UK government repeatedly emphasized its commitment to securing high-growth, export-led recovery. However, structural imbalances within the domestic economy continue to undermine this ambition.

While GDP growth has periodically shown signs of resilience, the UK’s current account deficit widened significantly, reaching 5.5% of GDP in late 2022. This persistent deficit is heavily driven by a structural shortfall in trade of goods, which consistently offsets the UK's strong performance in services exports such as finance, consulting, and digital technology.

In public plans, policymakers targeted a bold expansion of exports to rebalance the economy. Yet, actual export growth has trailed significantly behind expectations. High energy costs, supply chain friction, and stagnation in key manufacturing sub-sectors have dragged down overall industrial capacity. Output in manufacturing remains about 6.5% below its peak from the previous decade.

Simultaneously, aggregate demand remains heavily reliant on household spending. UK households continue to borrow to maintain consumption levels, with high debt-to-income ratios leaving little room for domestic savings. Rather than shifting towards export-led growth, the UK remains bound to a model of consumption-driven demand.

Central to these competitive difficulties is the UK’s "productivity puzzle." Workers in the UK produce less per hour than those in peer nations such as France and Germany. Since 2015, productivity growth in Germany has accelerated past that of the UK. Addressing this imbalance requires deep supply-side reforms: relaxing land planning regulations, reducing business tax burdens on capital investment, and reforming high-tech apprenticeships to address acute skill shortages in advanced engineering and green technologies.