The UK’s uneven economic recovery is a test for the winner of the election

Unlock Editor’s Roundup for free

Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.

The UK’s post-pandemic economic recovery has been powered by professional services and IT while retailers and many manufacturers languish, underscoring the uneven nature of the recovery Labor is expected to inherit.

Activity in consultants, accountants and software programmers has increased by more than 10 per cent since the last quarter of 2019, according to a Financial Times analysis of data published by the Office for National Statistics. In the same period, retailers recorded a 4.4 percent drop in production.

The chemicals industry, hit hard by Brexit and high energy costs, has recorded a staggering 25 percent drop in production.

Andrew Goodwin, UK economist at consultancy Oxford Economics, said sectors such as consultancy and software had been “star performers” before Covid-19 hit and that they had proved resilient during the pandemic due to remote working , among other practices.

With opinion polls putting Labor on course to secure a large majority on Thursday, he said the question facing the general election winner was how to promote a more broadly based recovery.

“You need more sustained medium-term growth stimulus across a broad range of sectors,” he said. “The challenge is to achieve supply-side reforms that have a tangible impact early enough.”

During the election campaign, Sir Keir Starmer’s party pledged to restore UK growth to the highest levels in the G7 group of advanced economies by unleashing private investment and implementing a “new partnership” with business.

An economic recovery will be essential for Labor to meet its goals of increasing government revenue while avoiding further tax rises or cuts in public spending.

But the decidedly mixed fortunes of the economy suggest that this will be no easy task. Overall UK GDP has grown by just 1.8 per cent since the last three months of 2019, according to the ONS.

This is the second slowest figure among G7 economies and compares with 8.6 percent growth in the US, despite the UK economy recording its fastest growth in two years in the first quarter of 2024.

While some parts of the economy have thrived, in particular parts of the service sector and business-facing software companies, consumer-facing companies are just beginning to stage a revival and parts of manufacturing are on their knees.

At the beginning of 2024, professional, scientific and technical activities increased by 12.2 percent compared to the last three months of 2019, the analysis found. Scientific research grew by 34 percent and management consulting grew by 18 percent over the same period, while accounting and legal services grew by 11 percent and 7 percent respectively.

The IT sector has been a notable winner of the post-pandemic shift in the Internet: output in information and communications, which includes computer programming and Internet services, has grown 18.6 percent from its pre-pandemic level.

This growth is notable because professional services and information and communication account for about 16 percent of the economy. The sectors also support exports of services, helping to consolidate the UK’s position as the second largest exporter of services after the US.

However, manufacturing output is largely unchanged from its pre-pandemic levels with energy-intensive industries such as chemicals, paints and rubber manufacturing particularly hard hit.

Steve Elliott, chief executive of trade body the Chemical Industries Association, said the clock was “running if the UK is to secure its place as an attractive and competitive place for chemical investment and the jobs of the future”.

He urged the next government to commit “to a long-term industrial strategy, with chemical businesses at the heart, more competitive energy costs and a net zero political environment”.

Supply chain disruption hit UK car manufacturing until mid-2022, but the sector has since recovered strongly and was 30 per cent larger in the first three months of this year than in the final quarter of 2019 .

Mike Hawes, chief executive at the Society of Motor Manufacturers and Traders, an industry body, said that while UK car and van production had “recovered”, the next prime minister should focus on “fostering economic conditions that support production competitiveness, part of a long-term industrial strategy to help attract investment”.

Output in most consumer sectors has yet to recover from pre-pandemic levels, with household finances hit by high prices, mortgage costs and rents over the past four years.

There are early signs of a rebound in the consumer sector: GDP per capita returned to growth in the first quarter and consumer price inflation fell to the Bank of England’s target of 2 percent in May, helping consumer confidence and sales retail.

Many economists expect the consumer sector to be a driver of growth for the rest of the year thanks to rising household incomes, and official figures suggest the recovery could be strong as the sector recovers from very low levels.

In the first three months of the year, output in accommodation was still 4.7 percent below its pre-pandemic level, while food and beverage service activities, such as bars and restaurants, remained 3.3 percent smaller.

Other personal services, which include hairdressers and beauty salons, fell 5.3 percent. The problems of these and similar businesses have been a major drag on growth, with hospitality and retail together accounting for 7.4 percent of the economy.

Helen Dickinson, chief executive of trade body the British Retail Consortium, said shops had had “an extremely challenging five years” and called on the next government to “fix the broken business rates system”.