UK recession could tip country into ‘lost decade’

The UK faces a “lost decade” of growth if action is not taken to address slumping business investment and labor shortages, a leading business lobby group has warned.

In a bleak economic forecast published on Monday, the Confederation of British Industry (CBI) said three-quarters of companies are struggling to find the skills and workers they need. He called for government policy changes, including a more flexible immigration system and tax breaks to increase investment.

“Britain is in stagflation – with skyrocketing inflation, negative growth, falling productivity and business investment. Companies see potential growth opportunities, but a lack of ‘reasons to believe’ in the face of headwinds is causing them to stop investing in 2023,” CBI Director General Tony Danker said in a statement.

“We will see a lost decade of growth if no action is taken. GDP is a simple multiplier of two factors: people and their productivity. But we don’t have the people we need or the productivity,” added Danker.

The UK is the only G7 economy that has yet to fully recover from the pandemic. Rising energy and food costs sent inflation to a 41-year high in October. Widespread strikes have become the norm in recent months as workers feel the worsening cost of living crisis.

UK workers suffered the biggest drop in their purchasing power in more than 20 years between April and June, when average real wages – which take inflation into account – fell by 3%. The fall in real wages was less pronounced in the third quarter, but it was still one of the largest since official records began in 2001.

In a sign of how disruptive the strike action has become, Conservative Party chairman Nadim Zahawi said on Sunday the government was considering bringing in the military to keep public services running.

The outlook for the UK economy next year is among the weakest of the advanced nations covered by the CBI forecast, with only German GDP expected to fall at a slightly faster pace. Germany felt the full force of the energy crisis triggered by the Russian invasion of Ukraine.

The CBI expects the UK economy to shrink by 0.4% in 2023 – a significant downgrade from the 1% growth forecast in June. The economy is expected to regain its pre-Covid size only in the second quarter of 2024.

Inflation is set to gradually decline over the next year, but will remain significantly above the Bank of England’s 2% target for 2023 and lead to a one-year decline in consumer spending, the CBI predicts.

The group expects business investment to decline from the middle of next year to 9% below its pre-pandemic level at the end of 2024. Output per worker is expected to remain 2% below its “already weak” pre-Covid trend at that time. time, the CBI said.

“While it is comforting that the next recession will be shallow, it is concerning that long-term weakness in productivity and business investment appears to be consolidating,” CBI chief economist Alpesh Paleja said in a statement. “It does not bode well for living standards and the economy’s ability to grow in the long term.”

The group said the government should address investment shortfalls with permanent tax breaks, which it estimates will free up £50bn ($61.4bn) in equity investment a year by the end of the decade.

“We cannot afford to have another decade where [investimento e produtividade] are stagnant,” said Danker.