The UK enters recession – Three points Scots need to know

The UK is now officially in recession. It is doing worse than comparable countries in terms of both growth and inflation and has earned the nickname “Stagnation Nation”. 

Scotland’s people are being let down. An independent Scotland back in the EU could hope to achieve the kind of growth and prosperity that similar sized countries without the same amount of resources achieve. Instead it is being dragged down by the choices Westminster makes. Here are three points Scots need to know

#1 The UK is falling behind – despite what some commentators claim

The UK is doing worse than other comparable countries and worse than the EU as a whole. Many commentators selectively use data to try to suggest that the UK is doing the same or better as other countries.

The US economy is doing much better than the UK – it grew at 3.3% in the last quarter of 2023 and inflation there is around three percent

The UK is also doing worse than EU countries. It is true that growth is now very slow in the EU – it was flat at the end of 2023 and is projected to grow slowly in 2024. However the EU is not in recession, while the UK economy shrank by 0.3%. 

And the bigger picture is changed by the fact that inflation – especially food inflation – is very high in the UK. In the EU, inflation is less than 3% and by the end of 2023, food inflation was 5.8%. Food inflation was 8% then in the UK, and inflation is now 4%. That means the big picture is actually significantly worse for ordinary people in the UK. High inflation plus recession add up to a big impact on the cost of living of ordinary people.  

The Resolution Foundation recently calculated that the UK’s poor economic performance, coupled with a higher degree of inequality than in the EU, means that middle-income earners in the UK are 20% already poorer than their counterparts in Germany and 9% poorer than those in France. Worse still is that low-income UK households are now 27% poorer than their French and German counterparts – equivalent to £4,300 per year.

That is likely to worsen. With the UK in recession, that negative growth may make it harder to find a job or get a pay rise. And for people who do lose their jobs, the UK does not offer much welfare support – any family with more than two children for example will have their benefits capped. That is one reason why child poverty is growing faster in the UK than any other comparable country. 

#2 Investment in the just transition

The US and the EU are investing heavily in green jobs and infrastructure. In contrast the UK government is failing badly. The UK’s privatised National Grid has been starved of investment. Taxes on the oil and gas industry have not been reinvested in the North East. A new electrical generator levy is predicted to raise £2 billion in Scotland this year but none of that will be returned to Scotland for investment in the green transition.

And now Labour has dropped its headline pledge to invest £28bn a year in a “green prosperity plan” in favour of a revised proposal that will reach less than £24bn in green investment over the whole parliament, a dramatic scaling back. Estimates from think tanks and academics suggest £30bn a year of public investment would be needed to put the UK in the game when it comes to the green industrial revolution. 

The US is building big – and green 

In the USA, massive investment in green energy and in the infrastructure has boosted jobs and the economy. The Inflation Reduction Act, which came into force last year, is the most significant climate legislation in U.S. history, offering funding, programs, and incentives to accelerate the transition to a clean energy economy and will likely drive significant deployment of new clean electricity resources.

Combined with other measures, the IRA is supercharging the US economy. Onshoring U.S. jobs supporting the domestic manufacturing of electric vehicles (EVs), batteries, solar panels, wind turbines, heat pumps and other clean energy technologies is jumpstarting a new clean industrial revolution.

The EU is forging ahead on green investment

Europe is also investing heavily in green energy infrastructure and will take a leading role in the manufacture and sale of everything from wind turbines to green hydrogen. The implementation of the European Green Deal (EGD) demands a huge amount of investments of around EUR 520bn a year. Additional investments to boost the EU's capacity to manufacture net-zero technologies amount to around EUR 92bn from 2023 until 2030.  

Over 1.7 million new green jobs could be created across Europe by 2040 due to the development of green molecules, such as hydrogen and biofuels, as part of the energy transition. Energy transition experts forecast the new activity could boost gross domestic product in the euro zone by €145 billion by 2040, or an average of €8.5 billion per year. The economic impact of those jobs will lead to cumulative GDP growth estimated at €1.3 trillion. 

#3 Where are the benefits of Brexit?

Economic analysis by Goldman Sachs – where Rishi Sunak used to work – said recently that Brexit has caused lower growth and higher inflation in the UK. Its findings revealed that UK goods trade has underperformed compared with other advanced economies by around 15% since the Brexit referendum. Secondly, the report said, business investment had been weak since 2016, falling notably short of the pre-referendum trend. 

The Structural and Cyclical Costs of Brexit, by James Moberly and Sven Jari Stehn, puts the hit at 5 percent of GDP, amounting to billions of lost income. That estimate is in the same ballpark as that of the Centre for European Reform, where John Springford said: “Brexit has blown a sizeable hole in Britain’s economic model.”

Brexit has damaged the attractiveness of the UK as an investment centre – global businesses prefer to be based in a bigger market like the EU or the US. It has also made it much harder to export goods and services to the EU and that has impacted the UK’s balance of payments. A skewed balance of payments is a trigger for higher inflation – but the remedy, high interest rates, punishes mortgage holders but doesn’t fix the issues that were causing the problem.

The loss of freedom of movement has affected businesses who need to hire people with specific skills. In Scotland particularly,  the loss of a seasonal workforce has impacted agriculture and hospitality. Investment from the EU into the Highlands and Islands is far from being matched 

Conclusion

The UK is in recession and on many measures it is falling behind comparable countries. That is damaging the quality of life and the opportunities of Scotland’s people. 

Scotland and the UK have different priorities. Scots want – by a large margin – to be back in the EU, able to trade and move freely with the group of 27 countries. They would like to be in the same situation as Ireland, which has access to both the UK and EU.

Scotland also has vast potential to take a leading role in the green industrial revolution, harnessing its renewable energy resources to create jobs and prosperity as well as to tackle the growing threat of climate change. 

No Westminster party is promising to move the dial on these priorities – Scotland needs to be independent.