UK: surprisingly strong growth

For some years, the UK seems to have been stuck in a rut of subdued growth. The third quarter GDP data, released on 12 November, have shaken that perception. In recent years, growth has been strong in the first quarter but then faded. This year, that has not been the case (see chart).

There are two main explanations: one cyclical (and related to the policy direction); one structural (and related to IT).

The cyclical, policy-related explanation is that the change of government has been welcomed. Whereas the early months of the Starmer government saw lots of doom and gloom and the need to fill black holes, the Burnham government is clearly delivering a cheerier message. Furthermore, the IMF gave the U.K. an encouraging report in October, encouraging it to “stay the course”. The budget deficit is projected to fall below 3% of GDP and the primary balance is expected to move into surplus from 2028 onwards. Partly, of course, that is because the previous government did a lot of the hard work. The freeze on income tax allowances lives on and delivers a considerable increase in tax revenues in the coming years.

The structural explanation is less well recognised and deserves more attention. The UK is benefitting from the IT revolution. And, arguably, to a greater extent than the US.

Although classifications of what constitutes the IT sector differ between the two economies, the contribution to UK GDP is arguably larger and has growth faster than in the US.

Attitudes to the UK economy and its prospects should change for the better.