How have living standards changed since 2020?
Household incomes have fallen since 2020. While steps have been taken to protect low-income households, more people are experiencing food and energy insecurity.
Growth has been slow since 2008. Low investment and policy uncertainty have slowed growth in productivity and so living standards have increased only modestly.
This article is part of the series Research in brief: Quick reads for the 2024 Parliament, produced for new Members of Parliament after the 2024 general election.
UK economic growth has been slow since the financial crisis of 2007 to 2009. Factors such as low investment levels and policy uncertainty have slowed growth in labour productivity (how much is produced for every hour worked). As a result, living standards have increased only modestly.
The UK economy has faced large shocks since 2019. The covid-19 pandemic caused huge economic disruption, and energy prices surged following Russia’s full-scale invasion of Ukraine in 2022.
One consequence of these events was that inflation – how fast prices are growing – rose to its highest rate since the early 1980s. UK price levels in April 2024 were 22% higher than at the beginning of 2021, according to the Office for National Statistics (ONS).
To try to bring inflation down, the Bank of England raised interest rates several times, reaching 5.25% by August 2023. Interest rates had been at less than 1% for more than a decade previously. Higher interest rates make saving more attractive and borrowing more expensive.
The economy shrunk sharply during the pandemic, but it is now larger than it was before the pandemic. As chart 1 shows, GDP was largely stagnant from early 2022 to the end of 2023, with some early signs of a modest recovery in 2024.
Due to the rising population, GDP per person in early 2024 was still around 1% below what it was before the pandemic.
The Library’s briefing on the rising cost of living in the UK has more on the effect of recent economic shocks on living standards. The Library also produces economic indicators as well as the interactive UK economy dashboard, so you can keep up to date with the latest economic data and analysis.
Taking a longer-term view, UK economic growth has been weaker since the global financial crisis of 2007 to 2009. According to ONS data, GDP growth slowed from an annual average of 3.0% between 1993 and 2007 to 1.5% between 2009 and 2023.
The main reason for this low economic growth has been low growth in labour productivity: the amount produced for every hour worked. Since the financial crisis, productivity growth in advanced economies has slowed according to data from the Organisation for Economic Co-operation and Development, and this has been particularly stark in the UK.
UK labour productivity growth slowed from an annual average of 1.9% between 1993 and 2008 to 0.4% between 2008 and 2023, as shown in chart 2. These types of comparisons are sensitive to the years chosen, but broadly, whichever years are chosen, annual productivity growth before the financial crisis of around 2% has fallen to around 0.5%.
Most of the economic growth that has occurred has been generated by more people being in work. Around 3.5 million more people were employed in early 2024 compared with 2009.
However, employment levels were around the same in early 2024 as before the pandemic. With a rising population, this means a lower share of people are in work, partly because more people were not able to work due to long-term health problems.
Economists have long researched and discussed the causes of this productivity slowdown, which is sometimes dubbed the “productivity puzzle”.
While there doesn’t appear to be a single factor driving the change, commonly cited factors are:
Other factors such as lower innovation, low skills and regional economic imbalances may also have reduced productivity growth.
Increases in labour productivity are essential for living standards to rise over the long term. Being able to produce more with the same number of hours worked frees up time for people to do other things.
Productivity growth and wage growth are closely linked over the long term. The Institute for Fiscal Studies think tank has said that low productivity growth is a major reason why average wages in the UK in early 2024 are roughly the same as in 2008, after adjusting for inflation.
Higher productivity growth is also beneficial to the public finances. The Office for Budget Responsibility, the UK’s public finances watchdog, estimated that a half of a percentage point increase in annual productivity growth, say from 1.0% to 1.5%, would result in the government borrowing around £40 billion less per year.
The Office for Budget Responsibility expects productivity growth to recover a little in the coming years, to around 1% per year. But this is still below the average from before the financial crisis.
Some economists think that technological innovations such as the widespread adoption of artificial intelligence could help increase productivity.
Nevertheless, increasing UK productivity over the next decade is likely to be a significant challenge.
Author: Daniel Harari
Photo by Greg Willson on Unsplash
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