"President Biden, fighting for re-election with abysmal approval ratings, can count himself lucky in at least one respect: He's not Rishi Sunak.
The British prime minister called a general election for July 4, and like Biden he is weighed down by public pessimism over the economy. But unlike Biden, Sunak can't claim that pessimism is disconnected from hard data.
Britain has had one of the worst performances of major economies since the pandemic broke out in 2020, with lower growth, higher inflation and weaker investment than its peers.
Blame bad luck, and bad choices. Some of those choices fall at the feet of Sunak's Tories, in particular the decision to leave the European Union. But that doesn't mean Labour, which might form the next government, will do better. And in that lies lessons for the rest of the world: Whatever the flaws of globalization, turning your back on it can be costly and difficult to undo.
Let's start with the bad luck. As in the U.S., inflation is among the public's top complaints in Britain. While the latest reading at 2.3% isn't high relative to other countries, the cumulative increase in prices since February 2020 has been larger in Britain than in the U.S. or eurozone (using an index that corrects for measurement differences).
Everyone's energy prices rose after Russia was sanctioned, but Britain's more than most; it imported very little gas from Russia, but lots from Norway and the U.S., whose prices soared after sanctions on Russia cut off supplies to Western Europe.
Britain also suffered one of the developed world's highest per capita death tolls in the first year of the Covid-19 pandemic, and long-term illness was a primary factor keeping people out of the labor force. The feeble labor supply has in turn kept unemployment low, vacancies high and wage growth brisk, contributing to inflation pressure. That has kept the Bank of England from cutting interest rates, cuts that Sunak, like Biden, is counting on.
Economic performance can seldom be tied to any leader's specific decision, and the shocks of recent years hit almost everyone. Still, Britain has been uniquely bad at coping with them.
Biden took heat for feeding inflation with government stimulus, but he got an enviably strong labor market. Not so Sunak, a former Goldman Sachs analyst who was Chancellor of the Exchequer at the start of the pandemic and became prime minister in 2022. A report by Federal Reserve economists shows that even though the U.K. administered almost as much stimulus relative to economic output as the U.S., it has less to show for it, underperforming the eurozone, Canada and the U.S. on job growth, hours worked per employee and productivity.
Weak growth alongside stubborn inflation are partly explained by stagnant productivity (output per worker), which in turn can be traced to an investment slump that began after Britain voted to leave the EU in 2016, with Sunak's backing.
Between early 2016 and the end of 2023, British investment fell 17% relative to other developed economies, according to J.P. Morgan. Half of that can be plausibly tied to the administrative barriers and uncertainty brought on by Brexit. A study co-written by Jonathan Haskel, a policymaker at the Bank of England, put investment in the U.K. 10% lower in 2022 than if the pre-2016 trend had persisted.
This is the opposite of what the Tories bet on: that outside the EU, Britain could become a lightly regulated magnet for foreign investment, a hub for the export of high-valued services, and a free trade partner with the U.S. and China.
Britain bet on globalization long before Brexit. "New Labour" under former Prime Minister Tony Blair embraced the so-called Washington consensus, in which goods, services, capital and ideas would flow ever more freely across borders.
In such a world it didn't matter that Britain had deindustrialized; manufacturing represented just 9% of national output in recent years, lower than in the U.S. at 11% and less than half the figure in Japan and China.
Britain thought it could pay its way because it excelled in what technology writer Dan Wang has called the "sounding-clever industries" such as media, finance and higher education.
But Brexit was horribly mistimed, coming just as globalization went into reverse: China became more explicit in its push to promote national champions at the expense of the West, and in the U.S., President Donald Trump embraced tariffs to protect American industries and punish China.
In a fragmenting world, multinationals want a presence in every economic bloc, and Britain left the largest.
Labour claims to be ready for this new world. "Globalization, as we once knew it, is dead," Rachel Reeves, likely Chancellor of the Exchequer in a Labour government, said in March. Echoing themes heard in Washington, Brussels and Beijing, she called for a "modern industrial strategy" that expands "domestic productive capacity," identifies sectors "critical in determining our future" and builds on Britain's existing "comparative advantage."
Yet whether Labour or the Conservatives win, both are constrained by the reality of a fragmenting global economy in which the U.K. lacks the U.S.'s deep pockets to subsidize investment, or name-brand manufacturers to anchor domestic production and innovation. For an economy Britain's size, self-sufficient supply chains are prohibitively expensive.
Britain could make up for that by gaining access to an internal market as big as China's or the U.S.'s. Both Labour and the Tories have ruled out rejoining the EU.
There are lessons here for the rest of the world. Globalization and free trade have their flaws, and sacrificing some efficiency -- via subsidies or tariffs -- may be necessary to correct them. But taken too far, the result will be smaller markets and higher prices. The U.S. won't feel the effects as much as Britain, but the direction will be the same and, as Britain is finding, hard to undo." [1]
1. U.S. News -- Capital Account: Britain Offers Hard Lessons for the U.S.. Ip, Greg. Wall Street Journal, Eastern edition; New York, N.Y.. 25 May 2024: A.2.
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