The UK’s economic problem explained in four charts
The UK’s economic growth has faltered, and labour productivity (GDP per hour worked) is now lower than in Italy, let alone Germany or France. The reasons for this decline are manifold, some of which, like ageing demographics and rising debt levels, affect most developed countries. But there is one factor that makes the UK stand out among its peers.
If you look at the UK’s GDP growth trends, you come to the unfortunate conclusion that after every major economic shock in the last 25 years, the UK emerged weaker than before. The chart below, taken from a study by Jagjit Chadha and Issam Samiri, shows that both after the financial crisis and the pandemic, the UK never recovered its lost output but instead settled on even weaker growth than before. This is in stark contrast to other developed countries like the US or the EU as a whole, which recovered their losses from both events (though in the case of the EU, the debt crisis of 2011 delayed the recovery quite a while).
UK GDP growth trends and major economic disruptions
Source: Chadha and Samiri (2025)
The main driver for this underperformance of the UK economy was the slow productivity growth. My second chart from the Chadha and Samiri paper shows labour productivity growth in the long run. As you can see, the UK had much lower productivity growth than Germany or France since the end of the Second World War, and for much of that time, it also lagged US productivity growth. But what is essential is that in the last 25 years, the gap between the UK and its peers has once again widened.
UK labour productivity growth is structurally lower, but the gap has widened in recent decades
Source: Chadha and Samiri (2025)
Ironically, British workers work longer hours per year than workers in Germany or France, but still don’t produce the same output. Why is that?
Hint: It’s not that UK workers are lazy. It’s that they use unproductive technology.
The third chart shows gross fixed investments as a share of GDP. It is immediately visible that the UK has been lagging behind other countries since the mid-1990s. And since fixed investments are the main driver for productivity gains through technological improvements, I am not surprised to see the UK lagging in productivity growth starting about five years after we fell back on fixed investment rates. That is kind of what I would expect to see if a country stops investing in its future.
Investment as a share of GDP has been lagging in the UK for 30 years now
Source: Chadha and Samiri (2025)
One culprit for this lack of investment is the government, which has reduced its investment activity from about 4.5% of GDP in the 1950s to the 1970s to about 1.5% of GDP starting with the Thatcher revolution. The idea was that by cutting taxes and deregulating the market, the government could step back from investing in the economy, unleash animal spirits and let businesses do the investing.
But in reality, what happened was the opposite. The fourth chart shows business investments as a share of GDP, which has been on a structural decline since the 1960s. During the high-tax period of the 1960s and 1970s, business investment as a share of UK GDP dropped from close to 14% to about 13%. From the Thatcher era to the financial crisis, tax rates were slashed rigorously and persistently, yet business investment dropped from about 13% of GDP to 8.5% of GDP. After the financial crisis, investment activity showed a cyclical recovery but then dropped again during the pandemic. Today, we are still stuck at 9% of GDP in business investments.
UK business investment as a share of GDP has dropped despite deregulation and lower taxes
Source: Chadha and Samiri (2025)
I hope the charts make clear that lowering taxes or deregulating markets has done nothing to improve business investments. Even when interest rates were close to zero, UK businesses and the UK government alike failed to take advantage of these low interest rates and kept investment activity to a minimum.
In my view, the lacklustre growth in the UK is primarily a crisis of our own making and what we need in the UK is a government that increases investments (particularly in infrastructure) and businesses that invest in the UK and into their business instead of optimising shareholder value by increasing gearing and returning as much cash to shareholders as possible. And it requires investors to ask the question of company management: “How do you plan to increase your investments in order to increase growth?” Because you most certainly cannot cut your way to profitability. If you want to become more profitable, you have to grow faster and to do that, you need to invest more.
Is this not a reflection of having a services based economy. It means gdp per capita is relatively high but grows relatively slowly. Investment is low because lawyers and bankers don’t need much investment, and as such productivity gain potential has been limited. Something which could potentially change as AI based productivity gains will benefit the U.K. significantly
this is the key: "In my view, the lacklustre growth in the UK is primarily a crisis of our own making and what we need in the UK is a government that increases investments (particularly in infrastructure) and businesses that invest in the UK and into their business instead of optimising shareholder value by increasing gearing and returning as much cash to shareholders as possible."
I fully agree. The persistent belief that the “invisible hand” alone can steer economic outcomes efficiently has long outlived its empirical validity. The past decades have shown that unregulated markets tend to optimize short-term private gains rather than long-term collective welfare.
If there is any evidence of an “invisible hand” at work, it is often the one guiding wealth into the same few hands — not the one ensuring sustainable and inclusive growth. Effective policy, strategic public investment, and institutional accountability remain indispensable for building resilient economies.