How Britain can handle the next decade

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Roula Khalaf, Editor of the FT, selects her favorite stories for this weekly newsletter.

Welcome students. I'm backpacking in Vietnam and Laos this week, so I've prepared something a little different.

As readers know, the purpose of Free Sunday Lunch is to present an analysis that counters conventional wisdom. For each piece, this often involves discussing positions with economists and marketing experts that aren't their house views.

So in this edition, instead of the usual compilation of my results, I wanted to share more of what the reviewers told me. I asked experts to paint a bullish picture for the British economy over the next decade, and what it would take to get there. Here's what they said.

First, the origin of the world. Labour's large parliamentary majority means that the UK now stands out for its (relative) stability. France has an unstable coalition and Germany faces elections in February. Political opinion on the EU is fragmenting. In the US, President Donald Trump seems more interested in creating uncertainty.

As for trade disruptions, Britain's expertise in services – and its position outside the EU – puts it less in the line of fire for Trump's tax plans. The US president is very focused on trade, especially with China and the European trade bloc.

Labor has already eaten up this “sustainability dividend” with high-tax logging companies in its Autumn Budget. Still, Marko Papic, chief expert at BCA Research, thinks that Britain's independence can be limited less than internal politics and trade wars can be useful:

“The UK should pursue an independent trade policy. The advantage of being outside the EU will be diminished if the UK simply adopts the American attitude towards China. A multilateral world is one in which countries with bad political behavior thrive.”

Building on this benefit will require a targeted approach to strike contracts. Agreements on trade in services could allow Britain to export its comparative advantage in higher value services more and more. And reducing the red tape involved in trading with the EU, the UK's biggest trading partner, will improve supply chains.

Little exposure to Trump again why some of the Major Wall Street institutions they are betting that UK equities will outperform the rest of Europe this year. They believe that banks and energy companies – which are heavily weighted in the London Stock Exchange – could get a boost from Trump's deregulation and oil policies. The low prices also look attractive.

But British stocks still need a catalyst to drive equity prices higher. I asked Hugh Gimber, global market strategist at JPMorgan Asset Management, where it might come from:

“Over the past decade, technology stocks have performed extremely well. But the UK is underweight in this sector, making it difficult to keep pace. If investors start getting more evidence that AI-related capex is set to unlock productivity gains across the economy, we can expect to see a wide range of sectors playing catch-up in the latest technology leadership. That will help level the playing field in the UK. “

Indeed, Britain is ranked third in Capital Economics' index of advanced economies best placed to benefit from AI adoption, given its large services sector and flexible labor market.

Efforts to get rid of Britain's massive pension fund – the largest in Europe – could support more investment in public and private equity, at home and abroad. But Gimber suggests there are better levers to pull:

“The stamp duty levy on share trading raised £3.2bn in the last financial year, but in the stock market, these transaction costs are a clear barrier to competition against other sectors. It not only affects investor participation, but also reduces the incentive for new companies to list on the UK.

Most importantly, successful policy change must create greater incentives for individuals and institutions to invest in the UK, by restoring confidence and removing barriers. “

A few studies recommend reducing stamp duty on shares can increase profits in the long run by increasing growth.

And with tighter public finances, “removing barriers” is where Sam Dumitriu, head of policy at Britain Remade, thinks the UK can get the biggest bang for its buck.

“Britain's challenge is to build things. It is very difficult to build new homes in our most productive areas, it is very difficult to build new energy infrastructure, and it is very difficult to build new transport links. Hinkley Point C, set to be the most expensive nuclear power station ever built, has been embroiled in a six-year dispute over inclusion of 'disco fish'.

We know what needs to be done. Revise the planning process so that it no longer blocks new investment in everything from homes to businesses. “

The Human Resources and Infrastructure Planning Bill is expected in the coming months. If it can streamline regulations, speed up approvals and clear more land for development, investment can jump.

The government's industrial plan, to be published this spring, is set to reveal opportunities to leverage private investment in infrastructure projects. It is also required to outline plans to strengthen Britain's existing capacity in high-demand growth sectors. These include financial and technical services, university research and education, renewables (wind, carbon capture and storage), life sciences, aerospace technology, artificial intelligence and creative industries. (Reducing red tape, encouraging broader investment and improved access to training and high-skill talent will all help.)

If Britain does these complex things well, but struggles with simple tasks, it is cause for optimism, adds Kallum Pickering, economist at Peel Hunt.

“Britain just needs the right policies to get back on track, not an institutional overhaul.” It has fallen far behind the average in things like infrastructure, housing and energy which is only up to the average of the developed world including living standards and productivity improvements. “

Well, until a few years ago, Britain struggled with political stability. Now that he has, the investment is back. Add a few trade deals, a plan to strengthen its comparative advantage and a strategic adjustment – and things could be better.

Dumitrio added: “If we continue to be good at what we are good at and very bad at what we are very bad at, the next decade could be Britain's best.”

Thoughts? Objection? Send me a message to freelunch@ft.com or in X @tejparikh90.

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