Recession. Proof.

#Week7 saw the news that many had feared – not least Prime Minister Rishi Sunak, who has pinned his re-election hopes on economic revival. A 0.3% fall in output across October, November and December 2023, following a 0.1% drop in the previous three months, has nudged the UK into technical recession territory, defined as two consecutive quarters of negative growth. 

It joins Germany – and, more surprisingly, Japan – in wrestling with the latest financial challenge. But the circumstances for each country’s malaise are noticeably different. In Japan, much of the blame can be placed on a shrinking population and rising dependency ratio. Germany is struggling with a fracturing of the high-value manufacturing industry that underpins much of its economy, just one symptom of which is plunging real estate values. 

For the UK, it is a different proposition, namely the stagnation in productivity. At a basic level, the more productive workers are, the more value they create for the same inputs, with GDP and wages rising accordingly. And in short, UK productivity isn’t increasing enough. 

This isn’t a recent or new problem. Prior to the global financial crisis, productivity grew at an average of around 2% a year; since then, it has managed barely 0.6% a year. To put that into context, total productivity grew more between 2003 and 2008 than it has in the 16 years since. As such, while a recession is straightforwardly bad news, it isn’t actually that much different to recent non-pandemic years. The economy has been hovering around 0% growth for some time.

The recession news has been met with considerable gloom in the press, but there are reasons to think this is a bit over-done. By definition, measures of GDP are backward-looking, and the prospects for 2024 look brighter than they did six months ago. Not least, the continuing (but admittedly shallowing) fall in inflation, and the hoped-for drop in interest rates later this year as a result. 

In many ways, the UK’s path back to significant productivity and GDP growth is a simpler one than in Germany – where fundamental change to its manufacturing-led ‘business plan’ could see a lot more pain before it gets better – and Japan, which has tried and failed to address the falling population problem for a number of decades. 

Economists and politicians will argue over the exact causes and treatments for the UK’s problems, but at heart the low productivity reflects a long-term failure to invest enough in the technology and skills that will push it further up the value curve. This is visible across the economy, incorporating everything from the comparatively low level of automation and robotics in UK manufacturing, to crumbling road and rail infrastructure that, in many cases, still relies on Victorian engineering. Invest more, and reap the long-term benefits.

The difficult part, of course, is figuring out how to pay for it all. Public spending – already under huge pressure, and with both tax take and debt at post-war highs – will not be in a position to make a material difference. So, if the UK is to pull itself out of its slump, it is private investment that will have to do the heavy lifting. Much of Government policy will be focused on how to unleash this potential, with liberalised planning to promote housebuilding and regeneration sure to have a major role to play.

Such a shift presents a real opportunity to the real estate sector – not only to capitalise on a changing policy environment, but to play a key role in reviving the UK’s fortunes. The problems facing the UK economy are profound, but not insurmountable. A recession is never good news, but nor is it a sign that things cannot improve.