Whether it’s a ‘productivity puzzle’ or the ‘British disease’, the UK economy has been underperforming for decades

History does not repeat itself, but it rhymes – and economic history is no exception. In 1964, a Labour government came to power in the UK with a pledge to curb inflation and to deliver growth. The growth plans were short lived. In 2024, in a cost-of-living crisis, Labour again won an election with a promise to “kick-start economic growth”. Only 18 months in, and plans have stalled again.

Weak economic growth has led to questions about whether the UK is once again the “sick man of Europe”. This echoes an earlier trope, the “British disease”, which described Britain’s poor economic performance from the 1950s to the 1970s. Compared to other European countries, Britain saw low investment, low productivity and low economic growth.

The British disease term peaked in the late 1970s, then slipped out of use as the country’s economic performance improved from the 1980s through to the early 2000s. But Britain’s more recent collapse in productivity growth has led to a new term: the “productivity puzzle”. Perhaps, instead of a puzzle, this should be understood as relapse into the old British disease.

In essence, the British disease described the relative decline of a nation that had led the world during the industrial revolution. It was the wealthiest country in the world for much of the 19th century, but by the early 20th century it had been overtaken by the US. This stemmed from Britain’s slow uptake of the innovations of the second industrial revolution (chiefly cars, chemicals and aerospace).

Britain underperformed in the 1950s and 1960s and its growth performance was sluggish compared with countries in western Europe, which soon overtook Britain.

In the 1960s, a team of economists from the US and Canada studied the British economy for US thinktank the Brookings Institution. Their 1968 report, Britain’s Economic Prospects, concluded that British growth was weak due to low investment and productivity.

Part of problem was the high level of government intervention in the economy after the second world war. The government was heavily involved in industrial policy but had a poor track record of picking winners. The history of British industrial policy is littered with high-profile failures.

In search of a remedy

Was there a cure for the British disease? Economists have disagreed over the past few decades. Writing in 1977, British economist Henry Phelps Brown observed that North Sea oil and gas production provided a temporary treatment through net energy exports.

On the other hand, another British economist, Nick Crafts, argued in 2011 that the British disease was cured by the increase in competition that came from joining the EU, and the role that Britain played in developing the single market.

Fellow British academic and economist George Allen argued that the only cure was a complete overhaul of UK institutions, particularly universities, where business and science subjects had been neglected in favour of classics. Now, of course, business and science subjects are now more widely taught.

Even if these cures were effective in the past, they are not effective today. The UK has left the EU and North Sea oil and gas has an uncertain future with new exploration actively discouraged.

Reform of the university sector is necessary to prevent Britain falling further behind. The country continues to trail its peers when it comes to the number of engineering students. If these are the solutions that cured the British disease in the past, they cannot vanquish the resurgent strain today.

How GDP growth has slowed:

Britain’s economic growth has experienced a slowdown since its heyday of the 1950s and 1960s. From 1992 until 2007, GDP per capita growth averaged 2.34% per year. Since 2008 this has fallen to 0.46% per year. Growth has effectively flatlined since 2023. A key factor has been the role of Brexit – a recent estimate suggested that the UK’s GDP has been reduced by between 6% and 8%.

The disease is no longer confined to Britain. From the 1970s, most developed countries also experienced a slowdown in economic growth. Similarly, the productivity puzzle is also occurring in other comparable countries.

One of the biggest areas where Europe as whole, and the UK in particular, are falling behind is in energy. The UK now leads in terms of the most expensive energy for industrial use in Europe. Urgent reforms are needed if the country is to avoid complete deindustrialisation.

The UK’s high industrial energy costs:

One widely touted panacea for the productivity puzzle is artificial intelligence (AI). However, two recent Nobel prize-winning economists have offered very different assessments of AI’s potential for productivity, ranging from a modest 0.53% increase over a decade to estimates several times larger.

In the meantime, there is no longer a solitary “sick man of Europe” but rather a malaise affecting much of the continent. Short-term remedies may be available, but over the long term, radical action and a renewed understanding of the causes of the disease are needed. The metaphor of acute illness may itself be misleading. Rather than a condition that can be cured, the disease resembles a chronic disorder that must be managed.

A note of caution from the insights of the economist Mancur Olson is also evident in the UK experience: when industrial policy becomes captured by interest groups, protection and subsidy displace innovation and competition, entrenching economic stagnation rather than correcting it.

Eoin McLaughlin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.