Northeastern experts look at why the U.K. economy has struggled to ignite and how the government plans to deliver on its growth pledge.
LONDON — The U.K. economy continues to struggle to get into gear.
The Office for Budget Responsibility, the U.K.’s public spending watchdog, has halved its growth forecast for the country. In October, its analysts calculated that Britain’s gross domestic product would increase by 2% in 2025. This week, it revised that to just 1%.
The downgrade and rising borrowing costs forced Chancellor Rachel Reeves, Britain’s finance minister, to make an unscheduled fiscal statement on Wednesday to announce cuts to the welfare budget to ensure she could meet her self-imposed spending rules.
Marianna Koli, an economics professor at Northeastern University in London, says the number of major events causing “shocks” to the nation’s economy over the past five years has made it difficult for analysts to accurately forecast GDP movement.
“The pandemic, the war in Ukraine, the practical outcomes of Brexit — once the uncertainty began to lift from 2019 onward — and now the potential new U.S. stance toward trade are all major challenges for economic growth in the U.K.,” says Koli.
“It will take some time for economists to be able to disentangle which elements contributed to, and how much, to the current economic malaise in the U.K. However, generally none of these events would be expected to increase GDP.”
Britain’s economic woes are being mirrored across Europe, where growth rates have languished below 1%. The Organisation for Economic Co-operation and Development downgraded growth forecasts for every Group of Seven nation this year, with France predicted to grow by 0.8% and Germany by just 0.4%. While the U.S. was also downgraded, its forecast is double that of the Eurozone, with OECD reckoning the American economy will grow by 2.2% in 2025.
The U.S. economy has gone gangbusters since coronavirus restrictions started to lift. From 2019 to 2024, the OECD reports that the American economy grew by 12.2%, far outstripping an anemic 3.2% in the U.K. and a recessional -0.1% in Germany over the same period.
Koli says that is partly due to the U.S. economy being shielded from some of the financial turbulence created by Russia’s invasion of Ukraine as it is “less reliant” on Eastern Europe for its energy needs. That, she explains, has helped Washington keep a lid on inflation and costs in energy-intensive sectors such as industrial production and construction.
A more flexible labor market in the U.S., versus Europe’s more workers-rights oriented system, has meant it has been able to adapt its workforce to post-pandemic demands more easily, Koli adds, aiding its COVID rebound.
“Clearly each system has pros and cons,” Koli says, “but one of the drawbacks of the European system is that firms may overspend on keeping employees on, which may hamper their financial performance or take them out of business, whereas an equivalent U.S. firm would have survived the same type of shock.”
Celal Ozkizan, Northeastern assistant professor in international relations and politics, says the prominence of the U.S. dollar in global markets has also played its part in a resurgent American economy. In times of global instability, the dollar is seen as a safe bet by investors.
The recent U.K. growth downgrade was a blow to Prime Minister Keir Starmer, who was elected last year on a central pledge to boost the country’s stuttering economy.
In the finance minister’s “Spring Statement” to lawmakers, Reeves identified key areas that she believes could spark the U.K. economy into life. She outlined how major infrastructure investments — including expanding London’s Heathrow Airport and a national house building program — growing the domestic defense sector and encouraging young people currently receiving sick benefits back into work could begin to turn the tide.
Last month, Starmer confirmed that his government would cut overseas aid by £6.4 billion ($8.2 billion) in order to increase defense spending from 2% to 2.5% of GDP by 2027 as Britain looks to react to growing global threats and the possibility of a decrease in Europe-bound military aid from the U.S.
Defense spending has been used successfully in the past as a tactic for growing the economy, notes Ozkizan. “It has worked historically,” says the London-based academic. “We know that government spending on the military has definitely been helpful to economic growth and to technological progress. Most of the time, more advanced technologies have come out of the military, like the internet, for example.”
But while defense investment can wield an economic uptick, Ozkizan and Koli both highlight that such expansion is a weakness of measuring a country’s progress using GDP metrics, which is a blunt measure of what an economy is producing.
“Defense spending is the classic example economics textbooks use for pointing out that not all GDP growth is always positive for well-being,” Koli says. “Although the U.K. government is very focused on economic growth as a number, we shouldn’t forget that policies and funding should also be geared toward societal well-being, and not only toward any spending needs brought about by global shocks.”
There was a ray of light in the Office for Budget Responsibility’s latest forecasts for the chancellor. It assessed that the government’s plan to deliver 1.5 million new homes by 2029, partly by removing red tape surrounding new developments, could boost GDP by 0.2% by 2030 and 0.4% by 2036. In 10 years’ time, housing construction could put as much as an extra £15 billion ($19 billion) annually into the Treasury’s coffers.
Jonathan Rokem, associate professor in politics and sustainability at Northeastern in London, says there is one major reason why pro-house building policies are forecast to drive the economy: jobs.
“It creates jobs, which is what we need,” says Rokem, who previously worked for the Town and Country Planning Association campaign charity in the U.K. “When you get a lot of house building, you have a lot of people that need to be engaged in that process, from providing the materials, to being on site, all the way to doing the planning. There are a whole range of things that house building creates in terms of economic opportunity.”
As part of its attempts to alleviate Britain’s housing shortage, the Labour Party is looking to water down rules relating to greenbelts — land around cities traditionally safeguarded to protect the countryside — so that sites considered less critical to rural conservation can be developed for housing.
Rokem, who has previously helped author a report examining the importance of securing local support for housing projects across Europe, argues that the government will have to convince “nimbys” — residents who hold a “not in my back yard” attitude when it comes to developments — of the importance of house building to the economy before the growth can be realized.
“These things have been promised before,” he highlights. “It is not the first time there has been a promise to deliver growth and deliver on housing. There is still a battle to win. There is going to be pressure on one side to make it happen but also constant pushback from local communities.”