Why is the UK growing so slowly?

In the second quarter of 2011 the UK grew at an annualised rate of 0.2%.  This compares to an average growth rate of GDP from 1992 to 2006 of 1.9% per year.

A closer look at the GDP figures (Table B1) suggests that all service sectors of the economy now have higher output that 2006.  The fact that total output is still below 2006 is due to falls in oil and gas production, farming, energy production and manufacturing which are down 31.3%, 12.6%, 6.8% and 11.4% respectively since 2006.

It is notable that each of these sectors is highly energy intensive.  This is consistent with an energy supply shock.  The government has frequently argued that these are the sectors of the economy that will provide future economy growth.  However, the latest set of GDP figures appear to be consistent with an economy rebalancing away from heavy industry and primary resource production towards services.  It is not immediately obvious that the production sectors are areas in which the UK is likely to have a comparative advantage in the future.

Indeed, as economist Larry Summers recently observed for the US:

The reality is that manufacturing employment has been trending downwards for 50 years.
… the fraction of all the workers in the United States who are engaged in manufacturing production right now, is less than a fraction of the workers who were engaged in farming in the late 1950's, and it's a very similar phenomenon.

Summers goes on to suggest that the future growth of developed economies is unlikely to come from manufacturing and production: it will come from knowledge and innovation.  Role models should now be the ubiquitous ARM chip designers or Dyson, rather than production magnates like Corus.

This raises a number of further questions: firstly, to what extent can fiscal policy, government spending or tax cuts offset falls in output due to energy intensive production industries?  And what effects will further rounds of monetary easing have on output and inflation if a significant proportion of output falls as the UK has experienced, and the slow current growth is due to specific industries such as oil and gas?

Clearly policy makers’ best response to these issues depends on the answers to these questions.  Unfortunately, these questions will only be resolved with time, and reams more data and research.  Until then, we’re more dependent on luck than judgement.