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 in 2024

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.

A chart showing the percentage change in UK GDP relative to the pre-pandemic level in Q4 2019. It shows the economy had recovered by mid 2021 and stagnated during 2022 and 2023.
Source: ONS, Gross Domestic Product: chained volume measures: Seasonally adjusted, series ABMI, May 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.

Slower growth since financial crisis of 2007 to 2009

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%.

A chart showing that between 1993 and 2008, productivity in the UK grew by, on average, 1.9% per year. Between 2008 and 2023 it has only grown by an average of 0.4% per year.
Source: ONS, Output per hour worked, series LZVB, May 2024

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.

Possible causes of weak productivity growth

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:

  • Low investment, in both the public and private sectors. Investment provides the building blocks – such as in infrastructure, technology and skills – for future productivity and economic growth. Researchers note that this is a long-term issue, with total UK investment as a proportion of GDP lower than in other G7 countries in almost every year over the past 30 years, according to International Monetary Fund data.
  • Policy uncertainty. Frequent changes to policy make it more difficult for businesses to confidently plan and invest over the long term. One example of uncertainty is the period surrounding the ‘mini budget’ of September 2022. The economist Jonathan Haskel, of Imperial College London, has also said that Brexit, including the uncertainty over the UK’s relationship with the EU, has contributed to stagnating UK business investment in the years after the referendum in 2016.
  • Lower business dynamism. This is the rate at which business and jobs are created and lost. A greater rate of business dynamism can boost productivity if resources end up being moved to higher-productivity firms. Analysis by the Office for National Statistics found that there has been lower business dynamism since the financial crisis, possibly explaining some of the UK’s productivity slowdown.

Other factors such as lower innovation, low skills and regional economic imbalances may also have reduced productivity growth.

One consequence is stagnant wages

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.

Outlook remains challenging

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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