Britain is set for a particularly bad bout of the January blues. Businesses are still reeling from a tax and cost-raising Autumn Budget. Economic confidence is waning. Growth has been stagnant since the Labour party came to power last July. To top it off, the weather has been ghastly. Some may wonder why anyone would want to invest in Britain at all this year. The reality, however, is more promising than the doom and gloom conveys.
Britain’s economic outlook in fact looks quite robust compared to other advanced economies. According to the Financial Times’ annual poll, economists reckon the UK will outgrow France and Germany this year. With its forte in services exports, Britain is also less exposed to potential US tariffs compared to its European peers. Labour’s strong parliamentary majority is another positive for investors as political uncertainty ramps up elsewhere. Private sector investment has picked up in recent quarters.
Financial markets and international investors are taking note. Wall Street banks and fund managers are more upbeat about UK equities. Analysts reckon the FTSE 100’s oil and banking stocks could benefit from Donald Trump’s deregulation agenda, while also offering diversification from frothy-looking US tech valuations. Given the more stable economic backdrop, British asset prices look like a bargain too.
Yet to secure sustained capital flows into the country and higher business investment, the government will need to play its part. Placing the bulk of the higher tax burden on employers was misguided. Nor has the Labour government helped itself with negative messaging. Britain has genuine structural challenges. But the cabinet has spent more time emphasising its miserable inheritance from the Conservatives than putting forward a clear and positive vision for growth that investors can get behind.
Any big tax or spending bazookas for business are off the table in the near term. The public finances are stretched, and Chancellor Rachel Reeves has committed to just one fiscal event per year. What, then, can the government do? There should be public spending restraint for starters. Businesses are still worried about the prospect of further tax rises, despite Reeves’ pledge that these will not happen.
Removing barriers to growth would help too. Indeed, economists reckon that a few elements of Labour’s policy agenda for the year ahead could raise economic forecasts further. Plans to streamline gummed-up planning procedures for infrastructure — from data centres to electricity pylons — can speed up development. And improved relations with the EU would reduce red tape with Britain’s largest trading partner.
The government’s industrial strategy, which is planned for the spring, could also give clarity on public projects, co-investment opportunities, and fiscal plans. That would help whet the appetite of businesses. It is also a chance to reiterate and build upon Britain’s comparative advantages, including in financial and professional services, university education, life sciences, creative industries, and advanced technologies. Such strengths have been underplayed amid the widespread pessimism. Labour should talk them up.
Delivering on these measures and communicating them effectively, with business leaders’ interests as hirers, innovators and investors at the forefront, is key. Done well, the government can catalyse an uptick in confidence at a time when the UK economy looks relatively attractive in the global context.
Bad economic vibes can end up becoming a self-reinforcing downward spiral. But Britain’s negative national mood seems excessive relative to reality. There is an investment case and a path to higher growth. Labour has made its job harder, but with a more optimistic vision and shrewd policymaking, it can still turn things around.
