Burnham’s real challenge

The latest GDP figures from the Office for National Statistics were never going to dominate the headlines. They arrived just as England’s World Cup campaign came to a dramatic end against Argentina, prompting yet another bout of national soul-searching and, remarkably, a minor diplomatic spat over the Falkland Islands that even required Downing Street to reaffirm Britain’s unwavering commitment to the Islands and their people.

And quite right too.

Against such a backdrop, a routine statistical release from the ONS barely warranted a passing mention. I rather suspect our football-loving outgoing Prime Minister gave it little thought, and I doubt his equally football-loving successor will spend much longer pondering it either.

That would be a mistake.

Because Thursday’s ONS figures weren’t simply another monthly snapshot showing Britain’s economy limping along at little more than walking pace. They were signposts pointing towards the economy Britain is becoming. Politicians habitually read GDP figures as a verdict on the past. In reality, they offer something far more valuable: a guide to Britain’s economic future.

The headline itself was hardly encouraging. May’s anaemic 0.1 per cent growth merely cancelled out April’s 0.1 per cent contraction, leaving the economy flat across the two months. Even the healthier-looking three-month growth figure of 0.7 per cent owed almost everything to a bumper March.

Most commentators stopped there.

They shouldn’t have.

A flatlining economy is not simply an economic problem. It is the principal reason British politics has become so febrile. Seven Prime Ministers in ten years is usually presented as evidence of political dysfunction. In truth, it is the symptom rather than the disease. Democracies rarely discard governments when living standards are rising. They do so when prosperity appears permanently beyond their grasp.

That is the inheritance awaiting Burnham when he walks through the black door of Number 10 and whoever he chooses to be his next door neighbour in Number 11.

My concern is not whether they possess the political skill to meet that challenge. It is whether they are asking the right questions. Judging by the economic narratives currently being offered, I fear Westminster remains obsessed with yesterday’s economy while Thursday’s ONS figures quietly reveal tomorrow’s.

To understand Britain’s predicament, it helps to think in three timeframes.

The first is the short term.

Much of Britain’s immediate economic outlook remains hostage to events thousands of miles away. Donald Trump’s unpredictable diplomacy (or naive lack of it) towards Iran, together with repeated threats to shipping through the Strait of Hormuz, has injected fresh uncertainty into global energy markets. Around one fifth of the world’s traded oil passes through that narrow stretch of water. Every escalation pushes energy prices higher.

The consequences are already beginning to show. The ONS reported that production fell by 0.5 per cent in May, while gas and electricity output dropped by 4.3 per cent over the latest three-month period. Those figures are not simply statistical noise. They suggest another inflationary squeeze could be building before winter has even begun. The cost of living crisis may be about to acquire a second act.

Politically, this is almost the easiest problem any Prime Minister could inherit. Ministers can point towards Washington, Tehran or global oil markets and argue that these are forces beyond Britain’s control. Most voters would probably accept that explanation.

The medium-term challenge is more structural.

Trump’s enthusiasm for tariffs, protectionism and economic nationalism is beginning to reshape global trade, just as geopolitical tensions are disrupting international shipping.

Again, the ONS figures tell the story in physical rather than theoretical terms. Ship visits to UK ports fell by 1 per cent during May and are down 6 per cent compared with a year earlier. Britain is an island economy. When fewer ships arrive, supply chains tighten, costs rise and investment slows. You do not need an econometric model to know that quieter ports rarely herald stronger growth.

Then comes the long term.

For years I have argued that Britain has been living through the after-effects of the 2008 Banking Crisis in general and the impact of Quantitative Easing used to sort it out in particular. Ultra-low interest rates and hundreds of billions of pounds of central bank money inflated house prices, financial assets and government borrowing, while doing remarkably little for productivity or productive investment.

Now that tide is going out.

Quantitative Tightening is quietly withdrawing somewhere between £75 billion and £100 billion of liquidity from the financial system every year. That is roughly equivalent to removing an NHS-sized budget from the economy annually. It inevitably means softer asset prices, weaker housing markets, more company failures and increasing pressure on employment.

Paradoxically, that should eventually prove healthy. Capital should begin flowing towards businesses capable of creating genuine economic value, rather than those simply benefiting from cheap money and inflated assets.

Except Britain is attempting to make that transition while simultaneously navigating an energy shock and a slowdown in global trade.

We are, quite literally, being hit from every direction.

And yet hidden within Thursday’s figures lies perhaps the most encouraging economic story Britain has seen for years.

The ONS statistics are not simply measuring economic performance. They are telling us where future prosperity is likely to come from.

One figure in particular deserves far more attention than it received. Basic pharmaceutical production increased by 5.4 per cent in May, making it the strongest-performing manufacturing sector anywhere in the economy. That matters because pharmaceuticals are not simply another factory industry. They are built upon research, intellectual property, highly skilled employment and scientific innovation. They represent precisely the sort of economy Britain increasingly excels at.

Look more broadly and exactly the same pattern emerges.

Brexit was sold as a means of liberating British trade. Instead, it has had the unintended consequence of strengthening Europe’s trading position while weakening our own.

Office for National Statistics figures show that Britain’s goods trade deficit with the European Union has widened from £96.5 billion in 2016 to around £138 billion today. British businesses export roughly £181 billion of goods to the EU while importing almost £320 billion. In less than a decade, the European Union’s goods surplus with Britain has increased by almost £42 billion — a rise of more than 43 per cent.

Whatever one’s view of Brexit, that is a sobering statistic.

We have made it harder for British firms to sell into our largest export market while making comparatively little difference to Europe’s ability to sell into ours. In trying to free British trade, we have strengthened the commercial position of our largest trading partner. That is not taking back control. It is a form of economic self-harm.

But the same ONS figures also hint at the way forward.

Britain’s comparative advantage no longer lies in competing with lower-cost manufacturing economies. It lies in finance, pharmaceuticals, biotechnology, higher education, legal services, insurance, artificial intelligence, creative industries and the wider knowledge economy.

London remains Europe’s pre-eminent financial centre. British universities continue to attract world-class talent. Our life sciences sector remains one of the most innovative on the planet. These are not niche industries. They are the sectors capable of generating the productivity gains and export earnings that have eluded the wider economy for much of the past decade.

In other words, Britain is becoming a services superpower.

Yet our politics continues to debate the economy as though we were still trying to recreate the industrial model of the twentieth century.

This is where I believe the debate about Britain’s economic future has become trapped.

Much of the discussion — whether it comes from Andy Burnham or, indeed, many others across the political spectrum — centres on industrial strategy, infrastructure spending and rebuilding Britain’s manufacturing base. Those are worthwhile ambitions. But they do not answer the question the ONS figures are actually asking.

How does Britain build an economy around the sectors in which it already possesses a global competitive advantage?

That requires a different conversation about Europe.

The question is no longer whether Britain should rejoin the European Union. That argument has been settled politically, at least for this generation.

Nor should we pretend the answer is simply to recreate the Single Market through the back door.

Instead, Britain should propose something new: a UK-EU Strategic Services Partnership.

Rather than allowing our relationship to be defined almost entirely by customs procedures and goods, both sides should focus on the sectors that create the greatest economic value: financial services, pharmaceuticals, biotechnology, legal services, insurance, digital commerce, artificial intelligence, higher education and scientific research.

There is already a precedent for this sort of pragmatic thinking. The Windsor Framework demonstrated that where Britain and the European Union recognise a shared economic interest, practical solutions can be found without reopening the constitutional arguments of Brexit. Likewise, the EU has long concluded sector-specific agreements with countries such as Switzerland, recognising that cooperation in areas including pharmaceuticals, medical technology and scientific research benefits everyone involved.

Britain should seek to expand that principle into a broader framework for services, built upon mutual recognition, regulatory cooperation and easier market access for professional firms.

Financial services provide perhaps the clearest example. London remains Europe’s dominant financial centre, not because Brussels permits it to be, but because nowhere else combines the same depth of capital markets, legal certainty, expertise and global reach. European companies continue to raise finance in London because it remains one of the best places in the world to do so.

The same applies to pharmaceuticals. Drug discovery, clinical trials, medicines regulation and scientific research are inherently international. Every unnecessary regulatory barrier increases costs for patients, businesses and governments while producing precious little economic benefit.

This is not about reversing Brexit.

It is about recognising where Britain’s prosperity will come from over the next thirty years.

The irony is that Brexit revealed Britain’s greatest strength almost by accident. It exposed the fact that our real competitive advantage does not lie in producing more low-margin goods. It lies in exporting knowledge, science, expertise and ideas.

Thursday’s GDP figures were therefore about far more than another disappointing month of economic growth.

They were signposts.

The politicians who continue arguing about the economy Britain once had are looking in the rear-view mirror. They need to start looking through the windscreen.

If Britain wants sustained prosperity once again, our next Prime Minister would do well to start looking in the same direction.

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