United Kingdom: Supply-side choices shape outlook – Rabobank

Rabobank’s Global Daily, titled “To govern is to choose”, discusses the UK’s political and macroeconomic backdrop as Labour’s Andy Burnham is set to become prime minister. The report highlights Brexit’s lingering drag on productivity, weak consumption growth, persistent inflation and high public debt. It argues Burnham must prioritise supply-side investment and difficult fiscal choices to alter the UK’s economic trajectory before the 2029 election.

Burnham faces supply-side investment dilemma

"The macroeconomic backdrop helps explain why this search keeps ending in disappointment. The UK's problem increasingly appears to be one of supply rather than demand. In our forecasts for 2024-29, consumption growth never exceeds a paltry 1.2% per year, while per capita spending is broadly flat."

"This leaves Burnham facing a dilemma that has trapped much of British politics over the past decade. He inherits high public debt, elevated borrowing costs and weak growth, while demands on the state continue to rise from defence, net-zero and an ageing population. At the same time, investors are increasingly reluctant to finance ever-higher levels of current spending, fearing persistent inflation."

"If Burnham wants to change the UK's economic trajectory in the run-up to the 2029 election, he will have to focus on expanding supply sooner than later."

"The problem is that expanding supply requires investment long before it delivers results. The UK needs more electricity generation and grid capacity if it wants to electrify industry, housing and transport. It needs more housing, infrastructure and business investment, which means overcoming planning constraints and local opposition."

"Markets welcomed this week the absence of a sharp turn to the left, but that alone does not solve the underlying growth problem. A supply-side agenda requires money, political capital, and time. Money remains scarce, with gilt yields near 5%."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)