The UK’s Future Depends on Investments

UK’s economics must be preserved, in order to survive Brexit.

The UK has been a subject of interest to several analysts, given its unique trend of economic growth. Until 2015, the economy was affected by higher growth than its peers in the G7 community; but was a victim of endogenous imbalanced growth. In 2016, the most significant event that deterred the economy from even such disproportionate growth, was Brexit.

Brexit has had some serious consequences. The costs of Brexit have been estimated to be around £58.7 billion. Though there are positive estimates on the economy’s growth, it is a general conclusion that the economy is weakening, post Brexit.  The worst-hit variable in the UK seems living standards, and the most affected segment of the economy is the working class, whose medium-term income is still a concern. With forecasts that average earnings would rise only half as fast, in the next five years, maintaining living standards is a current point of concern in the UK.  While economic resurgence is one of the main priorities, there are several sub-objectives to be achieved, one of them being wage management in the new harrowed UK.

In a scenario where there has been a general slowdown in public investments and global trade, obvious predictions of weak economic growth are imminent. Added to this are volatile variables like inflation and unemployment. In the face of this, the first and foremost consideration must be increasing productivity and therefore labour gains. Yet, this does not seem an obvious priority in post-Brexit Britain. Executing looser tax receipts, and lesser welfare spending by the government seem the latest on the agenda for public finances. With doubts about Britain reaping benefits of the single market, there are more reasons to consider wage management as the highest priority.

Imagine a world where economic growth, inflation and unemployment are in continuous equilibrium. It would be boring to live in such a world, but it would be ideal per se.  The three variables, considered the holy grail of economics, are extremely hostile towards each other, and governments have devoted all their time in managing them. To balance these variables notwithstanding allied variables like productivity, wages and taxes has been a paramount task. It is easy to spell out that inflation and unemployment must be controlled in order to reap benefits of higher economic growth. However, inflation and unemployment are both contributory and effected variables of economic growth. Deciding on a policy direction may be difficult given the endogeneity of these variables, and their influence on economic growth. So, fundamental microeconomic variables (read wages) must be first considered.

Wage-increases do not come easy when there is low growth existentially. Productivity must increase in order for wages to increase; and for productivity to increase, there must be sufficient investments made in labour-intensive as well as capital intensive sectors. Such investments must be cautiously made, so as to secure the level of employment, and not support substitution of labour with capital. Otherwise, investments may reap a counter-cyclical result.  Low unemployment is not just the result of higher wages, but is also a result of a higher opportunity cost of unemployment. Therefore, wage increases must be accompanied by increase in benefits, which would help to maintain the same purchasing power or even encourage purchasing power. This can be a means to productivity improvement.

The UK has already bordered stagflation for the past 2 years; receding growth and unprecedented inflation have been the hallmarks of the economy. In such a scenario, unless the right investment occurs in essential sectors, there is a risk that the UK will slip into stagflation, as an aftermath of Brexit.

With such a situation on one side, undeterred consumer spending may not be a positive news after all. Such circumstances may be the result of increased liquidity in the market, due to a downward spiralling exchange rate, and the incidental growth of real wages.

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