London Daily

Focus on the big picture.
Thursday, Mar 19, 2026

Why is the UK economy lagging behind the US, Germany and others?

Why is the UK economy lagging behind the US, Germany and others?

The UK economy is struggling - and people are feeling it in their pockets, as wages fail to keep up with rising prices.

The International Monetary Fund (IMF) predicts the UK economy will shrink this year while every other major economy will grow.

The Bank of England also forecasts a recession in the UK in 2023 - albeit one that is shorter and less severe than previously forecast.

Perhaps it's not surprising the outlook is bleak given the pandemic, the war in Ukraine, and soaring costs of both energy and food.

But why is the UK seemingly faring worse than other rich countries such as the US, Germany and France?


Is the UK really lagging behind?


Forecasts are never perfect. There are so many factors that affect economic growth - from geopolitics to the weather - that, inevitably, predictions often miss the mark. But they can point in the right direction.

And the existing evidence shows other countries have taken less of a hit from the huge challenges of recent years than the UK has.

Figures from the Organisation of Economic Cooperation and Development (OECD), which looks at how rich countries are performing, show the UK economy fell further than others in the first months of the pandemic.

The UK's pace of recovery was fast once the economy reopened - but not fast enough to make up the lost ground.


But the difference between the UK and others may not be quite as big as it appears.

That's because most countries measure the output of their public services, such as health and education, based on the costs - a nurse's wage, for example. In the UK they are accounted for differently, by valuing the services delivered - such as operations in hospital.

As a result, the UK's figures better reflect the impact of closed schools and cancelled operations during Covid, as well as disruption due to strikes.

The bigger picture, however, remains: the Bank of England and the IMF both expect the UK economy to shrink this year, while other G7 countries are expected to grow.


Some observers, including pro-Brexit economist Julian Jessop, believe the IMF was overly gloomy about the UK's prospects and that the differences under discussion - a percentage point here or there - are small.

Nevertheless, he says, there is still definitely "something to explain" about the UK's flagging economic performance.


Is it all down to Brexit?


Estimates about the cost of Brexit vary - according to a report by Bloomberg it is costing the UK economy roughly £100bn a year, and the economy is 4% smaller than it might have been if the UK had stayed in the EU.

"The EU is a very rich part of the world," says Carl Emmerson, deputy director of the Institute for Fiscal Studies, an independent think tank. "And we've chosen, for better or worse, to make trade with that grouping of countries a lot more difficult, so it's clearly going to be something that makes it harder for the UK economy to grow."

Business investment has stagnated since the referendum vote in 2016 too, he says - another "drag on growth". A Bank of England policymaker has said that Brexit hit UK investment to the tune of £29bn.

EU workers used to come freely to work in the UK but can no longer do so, making it hard for the hospitality, agriculture, and care sectors to find enough staff.

Julian Jessop is a fellow at the free market think tank the Institute of Economic Affairs and describes himself as a "Brexit optimist". He believes there are big potential gains from leaving the EU, but agrees there have been short-term economic costs.

"We're still in a sort of transition phase, where the negatives are dominating," he says.

But he says those negatives are "smaller than people have been arguing" and "more likely to be temporary, because a lot of them have to do with uncertainty and the process of adjustment".


What else is affecting the economy?


Energy costs


Russia's invasion of Ukraine sent global energy prices soaring - but the impact varies between countries.

The US has its own domestic sources of fossil fuels and some European countries have more alternative sources of energy, Mr Emmerson says. France, for example, has a large nuclear network, and Norway has significant hydropower.

"Britain is pretty exposed," he says.

Moreover, the way the UK prices electricity is based on the cost of gas, the most expensive form of electricity generation. That has pushed up bills across the economy and made inflation worse, Mr Jessop says.

Workforce shortages


Most economies saw their workforce shrink during the pandemic.

But again, the UK is an outlier, with numbers failing to bounce back after the crisis.


Economists are still trying to work out why. It seems it is not just down to having fewer EU workers.

Young people have opted to study rather than work, older people have retired early, and more people are receiving long-term sickness benefits.

There are signs the workforce is starting to grow again, which could help boost growth and tax revenues later this year.


Long-term problems


There are also more fundamental reasons behind the UK's weaker performance, suggests Cambridge University economist Diane Coyle.

While the economy has slowed since the financial crisis in 2008, the roots of the problems go back much further, she argues, with investment in decline since the 1990s.

That left the economy lacking the resilience to cope with the triple shocks of Covid, Brexit and the war in Ukraine.

"That's down to the long-term weaknesses, long-term under investment, in the private and the public sector, [and] degradation of public services and infrastructure, which are just essential if the economy is going to grow," she says.

For its part, the government says the UK economy is resilient.

Responding to figures showing that the UK narrowly avoided a recession in 2022, Chancellor Jeremy Hunt said the numbers showed "underlying resilience" - but added the country was "not out of the woods".

Newsletter

Related Articles

0:00
0:00
Close
GB News Faces Regulatory Complaints Over On-Air Remarks on ‘Genocide’ Claims
UK Signals Expanded Support for Gulf Allies as Iranian Attacks Intensify Regional Threats
UK VAT Decision Opens Path for Potential Refunds to U.S. Biopharma Firms
UK and Canada Advance ‘Middle Power’ Strategy to Shape Global Influence Beyond Superpowers
Google Explores AI Opt-Out Features in Search to Address UK Regulatory Concerns
Google Explores AI Opt-Out Features in Search to Address UK Regulatory Concerns
UK Fuel Prices Poised to Surge as Global Tensions Drive Oil Market Volatility
UK Fuel Prices Poised to Surge as Global Tensions Drive Oil Market Volatility
UK Holds Back on Hormuz Escort Mission While Continuing Talks with Allies
TrumpRx Pricing Platform Faces Scrutiny as Some Medicines Remain Costlier Than in the UK
UK, Netherlands and Finland Explore Joint Defence Investment Bank to Boost Military Capability
Deadly Meningitis Outbreak in Kent Raises Alarm as Cases Surge and Emergency Response Expands
UK Security Adviser Viewed US-Iran Nuclear Deal as Within Reach Before Sudden Escalation
UK Prime Minister Urges Continued Focus on Ukraine Amid Escalating Iran Conflict
UK Introduces New Safeguards to Shield Lenders from Bank Run Risks
UK Promotional Products Market Surpasses £1.3 Billion as Demand Strengthens in 2025
Reeves Pushes for Deeper UK-EU Economic Ties to Revive Growth
UK Security Adviser Saw No Imminent Iranian Nuclear Threat Days Before War Erupted
France Signals Warm Welcome for UK Return to EU Single Market Amid Renewed Cooperation Talks
UK Defence Official Criticises Boeing Over Delays to E-7 Wedgetail Programme
UK Urged to Secure Quantum Talent as Minister Warns Against Repeating AI Setbacks
UK Mayors Set to Gain New Spending Powers Under Reeves’ Fiscal Devolution Plan
Western Allies Urge Restraint as Israel Weighs Expanded Ground Operation in Lebanon
Trump Warns NATO Faces ‘Very Bad’ Future Without Stronger Allied Support in Iran Conflict
UK Minister Says Britain Not Bound to Support Every Demand From U.S. President
Starmer Tells Trump Britain Will Not Be Drawn Into Wider Iran War
Starmer Tells Trump Britain Will Not Be Drawn Into Wider Iran War
UK Set to Introduce Steel Tariffs of Up to 50 Percent in New Industrial Strategy
European Governments Decline Trump’s Call to Send Warships to Reopen Strait of Hormuz
Fears Over Iran Conflict Weigh on UK Consumer Confidence
Starmer Says UK Working With Allies on Hormuz Shipping Plan After Trump Raises Pressure
Iran War and Energy Shock Shake Britain’s Economy and Political Debate
Deadly Meningitis Outbreak at UK University Leaves Two Dead and Several Seriously Ill
Deadly Meningitis Outbreak at UK University Leaves Two Dead and Several Seriously Ill
King Charles and Queen Camilla Share Personal Tributes to Their Mothers on UK Mother’s Day
Prince William Honors Princess Diana with Mother’s Day Tribute
UK Economy Stalls in January as Households Cut Back on Eating Out
AI-Generated Singer Becomes Viral Voice for Iranians With New Anthem
London Private Club Founder Plans Exclusive Palm Beach Venue Near Trump’s Mar-a-Lago
Ed Davey Urges Britain to Build Fully Independent Nuclear Missile Capability
What the UK Covid Inquiry Is and How It Investigates Britain’s Pandemic Response
What the UK Covid Inquiry Is and How It Investigates Britain’s Pandemic Response
US Treasury Links British Polo Patrons to Alleged Venezuelan Oil Proceeds Laundering Scheme
Hundreds Gather in London Despite Ban on Annual Pro-Palestinian March
Two Dead and Multiple Students Seriously Ill After Invasive Meningitis Outbreak at UK University
UK Considers Deploying Ships and Mine-Hunting Drones to Reopen Strait of Hormuz
Starmer and Trump Discuss Urgent Need to Reopen Strait of Hormuz Amid Escalating Iran Conflict
Prince Harry and Meghan Markle’s Planned Australia Visit Draws Mixed Reaction From Local Communities
Trump Calls on France and UK to Help Safeguard Strait of Hormuz Shipping Route
Boris Johnson Labels Bitcoin a ‘Ponzi Scheme’, Sparking Debate in Crypto World
×