The UK economy is decelerating: The construction boom cannot hide the deep-seated crisis

The data released by the Office for National Statistics of the United Kingdom on August 14th served as a wake-up call: the quarter-on-quarter growth rate of the country's gross domestic product in the second quarter plummeted from 0.7% in the first quarter to 0.3%, marking the lowest increase since the recovery period of the pandemic last year.

Under this seemingly flat data curve, the three major economic sectors show a worrying divergence - the construction industry was the only bright spot with a 1.2% month-on-month growth, the service industry barely maintained a slight expansion of 0.4%, and the manufacturing industry fell into a contraction predicament of 0.3%. This distorted growth structure not only reveals the fragile nature of the current economy, but also heralds deeper systemic risks.

Behind the apparent prosperity of the construction industry lies the unsustainability driven by policies. The "National Infrastructure Strategy" launched by the Conservative government to stimulate the economy has entered a concentrated construction period. Large-scale projects such as the HS2 high-speed railway and the renewal of nuclear power plants have driven the growth of construction industry output. However, this prosperity is built on a fragile fiscal foundation: while government capital expenditure has soared by 23% year-on-year, the fiscal deficit as a proportion of GDP has exceeded the warning line of 5%. More crucially, the import dependence on construction machinery is as high as 65%, leading to a huge amount of fiscal expenditure flowing out through the supply chain. When the Chancellor of the Exchequer is forced to roll out a austerity package in September, this illusion of growth made of steel and concrete is likely to crumble rapidly.

The continuous contraction of the manufacturing industry has sounded the alarm for industrial hollowing out. The 0.3% negative growth in the second quarter marks the third consecutive quarter of decline, with the 12.4% year-on-year plunge in the output of the automotive manufacturing industry being a typical example. The phenomenon of Jaguar Land Rover and other enterprises moving their production lines eastward to Slovakia is no accident. The remaining enterprises are Mired in the "aftereffects of Brexit" : the EU's rules of origin require that the proportion of British components be 55%, but the number of local parts suppliers has dropped by 40% in five years. While German manufacturers are enjoying the export dividends brought by the depreciation of the euro, British factories have to pay an additional 28% compliance cost for importing EU bolts. This systemic damage has led to the proportion of manufacturing in GDP falling below 9%, hitting a new low since the Industrial Revolution.

The weakness of the service industry has exposed the exhaustion of domestic demand momentum. The financial industry unexpectedly slumped during the interest rate hike cycle, with investment banking revenue dropping by 15% year-on-year, reflecting the loosening of the City of London's global status. The consumer sector is even more shrouded in gloom: retail sales have experienced negative growth for five consecutive months, and Marks & Spencer's financial report shows that the sales of non-essential items have dropped by 18%. Although the overall inflation rate dropped back to 6.8%, food prices still rose at an annual rate of 9.2%, forcing people to cut back on their spending. This shrinking demand has triggered a chain reaction, with the number of bankruptcies of catering enterprises surging by 45% year-on-year, reaching a peak since the 2008 financial crisis.

The current economic predicament stems from the interweaving of three structural contradictions. The trade barriers triggered by Brexit continue to escalate. The volume of freight across the English Channel has dropped by 25% compared to 2019, and customs costs have caused small and medium-sized enterprises to spend an average of 140,000 pounds more each year. Monetary policy is in a dilemma: core inflation stubbornly remains at a high level of 6.2%, forcing the central bank to maintain the benchmark interest rate of 6.25%, but the high-interest-rate environment led to a 22% surge in corporate bankruptcies in the second quarter. What is even more fatal is the insufficient investment in innovation. When the United States passed the Chips Act and invested 280 billion US dollars, the proportion of R&D expenditure to GDP in the United Kingdom dropped to 1.6%, less than half of the average level of OECD countries.

Potential risks are creating a cumulative effect. After the ratio of national debt to GDP exceeded 103%, the international rating agency Fitch has placed it on a negative watch list as fiscal sustainability raised a red light. The labor conflict continues to escalate. The junior doctors' strike has entered its seventh month, and the railway union launched a strike during the peak tourist season. The traffic paralysis in July alone caused an economic loss of 300 million pounds. The global competition has also brought about external shocks: the US Inflation Reduction Act has attracted British new energy enterprises to invest across the sea, and Germany's trillion-euro chip subsidy plan is siphoning semiconductor talents. The hollowing out of the industry is accelerating.

The UK is at a critical crossroads of transformation. If the manufacturing revitalization plan cannot be rolled out as soon as possible, the trade rules after Brexit cannot be reformed, and the technological innovation ecosystem cannot be rebuilt, the economy may fall into a vicious circle of "infrastructure dependence - debt accumulation - consumption contraction". Policy makers need the courage to go beyond the election cycle and make fundamental changes in industrial policy, technical education and international collaboration. As the hustle and bustle of construction sites subsides, only a solid industrial foundation and an innovative bloodline can support this old industrial country through the storm. The window for transformation is closing, and history will not wait for those who hesitate.