Unlock Editor’s Digest for free
FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.
Britain is heading for a particularly serious bout of blues in January. Businesses are still recovering from a fall budget that increases taxes and costs. Economic confidence is waning. Growth has been stagnant since the Labor Party came to power last July. To make matters worse, the weather has been horrible. Some might wonder why anyone would want to invest in Britain this year. Reality, however, is more promising than pessimism conveys.
In fact, Britain’s economic prospects look quite strong compared to other advanced economies. According to the Financial Times’ annual surveyEconomists estimate that the United Kingdom will overtake France and Germany this year. With its strength 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 increases elsewhere. Private sector investment has recovered in recent quarters.
Financial markets and international investors are taking note. Wall Street banks and fund managers are more optimistic on UK stocks. Analysts reckon FTSE 100 oil and banking stocks could benefit from Donald Trump’s deregulation agenda, while offering diversification from frothy-looking US tech valuations. Since it is more stable economic In this context, British asset prices also look like a bargain.
However, to ensure sustained capital flows into the country and increased business investment, the government will have to play its role. It was a mistake to place most of the increased tax burden on employers. The Labor government has not helped itself with negative messaging either. Britain has real structural challenges. But the cabinet has spent more time emphasizing its miserable inheritance from the Conservatives than presenting a clear, positive vision for growth that investors can get behind.
Any major taxes or spending bazookas for businesses are out of the question in the short term. Public finances are stretched thin and Chancellor Rachel Reeves has pledged to hold just one fiscal event per year. What can the government do then? To begin with, there should be moderation in public spending. Businesses are still worried about the prospect of new tax increases, despite Reeves’ promise that they won’t happen.
Removing barriers to growth would also be helpful. In fact, economists believe that some elements of Labor’s political agenda for next year could raise economic forecasts even further. Plans to simplify infrastructure planning procedures, from data centers to power pylons, can accelerate development. And improved relations with the EU would reduce bureaucracy with Britain’s largest trading partner.
The government’s industrial strategy, due in spring, could also provide clarity on public projects, co-investment opportunities and fiscal plans. That would help whet the appetite of companies. It is also an opportunity to reiterate and build on Britain’s comparative advantages, including in financial and professional services, university education, life sciences, creative industriesand advanced technologies. These strengths have been underestimated amid widespread pessimism. Labor should convince them.
It is key to comply with these measures and communicate them effectively, keeping the interests of business leaders as contractors, innovators and investors at the forefront. If done well, the government can catalyze a rebound 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 sentiment seems excessive in relation to reality. There is a case for investing and a path to further growth. The Labor Party has made its job harder, but with a more optimistic vision and astute policymaking, it can still turn things around.