Incoming data on the UK economy continues to provide very little to cheer about. The stubborn fog surrounding the manner of the UK’s exit from the EU has clearly weighed on private sector decision-making. Meanwhile the electorate continues to mull a lurch away from the centre ground, a move that many argue could lead to a decline similar to that experienced in post-war Britain. But a more pertinent question may be: how much of said relative decline, and its subsequent arrest at the end of the 1970s, can be attributed to changing political ideologies?
By the turn of the millennium, real GDP per person in the UK was more than six times the 1870 level. However, in spite of these dramatic improvements, the UK had spent much of this intervening period underperforming its competition, both near and far. Some of this underperformance was unavoidable – the US overtook Britain due to its vast advantages in raw materials per head. However, the UK also underperformed its European peers for much of the post-war period.
Level of UK GDP per person by the turn of the millennium, compared to 1870
What role did politics actually play?
The temptation to commandeer chunks of economic history to support a particular ideological leaning is strong. The more likely truth is that politicians are often in yoke to the underlying economy and its pre-existing idiosyncrasies and eccentricities, rather than the other way around. Admittedly, some of the UK’s poor productivity growth during this post-war period can be chalked up to the nationalisation of industries. This curtailed innovation and competition within those industries. The state also had an unhealthy tendency to try and fine-tune the economy, a lingering legacy of the necessities of the wartime economy. We now see that such meddling served to destabilise the economy by accentuating, rather than attenuating, downswings.
However, other, more structural, flaws played an equally significant, if not dominant, role. For example, cartelisation, which had proliferated during the 1930s and 1940s, characterised the greater part of the manufacturing sector. Inefficient plants and businesses were kept alive. The absence of competition in much of the economy was further reinforced by the legacy of inter-war protectionism and the UK’s initial refusal to join the European Economic Community (EEC), prompting British firms to concentrate their exports on the less competitive Commonwealth markets.
“Politicians are often in yoke to the underlying economy and its pre-existing idiosyncrasies and eccentricities, rather than the other way around”
Accompanying all this, UK industrial relations had become increasingly dysfunctional with the emergence of disproportionately powerful trade unions. This, coupled with the high employment levels of the era, helped create an inflexible and expensive workforce, which acted as a deterrent to investment and innovation.
But it is worth noting that these structural factors were present under both Conservative and Labour parties throughout the post-war years, and they can (and do) exist in nations that are governed under all shades of the political spectrum.
Thatcherism to the rescue?
The supply-side policies implemented by Margaret Thatcher’s Conservative government between 1979 and 1990 were certainly helpful in reversing the UK’s relative decline. The sweeping range of policies included reforming industrial relations, privatising state-owned businesses, encouraging foreign investment and deregulating the economy. It is clear that supply-side reform stimulated much-needed competition among British industries, leading to higher productivity growth. By the end of the 20th century, UK income levels had surpassed those of its European peers, putting an end to economic decline.
However, it is important to note that Thatcherism wasn’t the only reason for this turnaround. The UK was already opening its markets up to foreign competition before Thatcher came to power through its entry into the EEC in 1973. Some plausibly argue that the UK’s EEC membership, and the faster productivity growth brought on by greater competition with more technologically advanced European firms, was the dominant factor in ending the UK’s relative economic slumber.
“By the end of the 20th century, UK income levels had surpassed those of its European peers, putting an end to economic decline"
Grand historical shifts are more often than not the product of multiple interacting variables, rather than a single overriding cause. Previous drags on UK economic performance had arguably less to do with the reigning political ideology of the time and more to do with long-standing institutional flaws within the economic structure itself. Similarly, the cure to Britain’s decline was rooted in greater competition, something that can (and should be) implemented by any political party straddling either side of the political divide.
More importantly for investors, elections are difficult to forecast as even the best-informed armchair political strategists will testify to. Guessing the resulting policy changes is even harder, complicated further by various constitutional defences the developed world democracies have sensibly erected. This should leave us wary of attempting to make tactical investment trades based on which party comes to power next in the UK. And, as always, the most efficient bulwark against the impact of big swings in one country’s political direction is through diversification across different geographical regions.
By William Hobbs, Chief Investment Officer of Barclays Investment Solutions - the team focused on the core aspects of the bank's investment offering. He leads strategic and tactical asset allocation, as well as investment philosophy.