The next geopolitical economic shock: putting the UK’s resilience first

In the last five years, the UK has faced two significant external economic shocks as a result of geopolitical events outside of the control of domestic politics: the COVID-19 pandemic and Russia’s war in Ukraine. It now faces the difficult prospect of navigating a world of increasing great power competition, where the international-rules based system is increasingly under threat. 

According to the Office for Budget Responsibility’s ‘Geopolitical stress test’ undertaken in 2022, rising geopolitical tensions and UK policy responses could see UK net debt increase by 25% by 2035. 

The Heywood Foundation in a survey of UK businesses found that over 60% of respondents cited geopolitical risks becoming an important part of their decision-making, with 43% of businesses wanting advice and guidance from the government on managing these risks.

The UK is particularly vulnerable to external economic shocks as a result of shifting geopolitics, not least because:

• Historically, the UK de-industrialised at a faster rate than the rest of Europe between 1995-2010 and has the smallest percentage of manufacturing amongst the G7. This means we have less domestic capacity for manufacturing vital goods at home.

• The UK Government invests well below the OECD average in public infrastructure and the UK is ranked the lowest in the G7 in terms of business investment.

• The UK currently imports 13.3% of the energy it uses on its electrical grid, primarily oil and gas from the USA, Norway, the Netherlands, and Qatar. Energy imports increased to £117 billion in 2022 as a result of Russia’s war in Ukraine.

• The National Health Service is one of the largest importers of medicines in the world. These medical supply chains in particular are complex and dependent on unreliable partners. For example, 90% of the medicines used in the NHS are imported. India produces a third of all generic drugs used in the NHS, but 70% of the active ingredients in these drugs come from China.

• The UK imports nearly half of all its food and 84% of its fresh fruit. Around 28% of food was imported from the European Union in 2020. This makes UK food prices vulnerable to climate shocks to the global food supply chain and any disruption in Europe including farmers strikes.

Whether caused by the further deterioration of stability in the Middle East, Ukraine losing its war against Russia, the ripple effects of the Trump administration’s tariff wars, or action by the People’s Liberation Army against Taiwan, it is very likely that the UK will face a third external economic shock in the next five years.

The Government’s growth agenda is hostage to geopolitics and will fail if there is another geopolitical shock which depresses economic growth. Ministers should frame its growth goal as not just a goal for growth in and of itself, but economic growth towards resilience. This would tie into the Government’s narrative that increased defence spending will also spurn economic growth. 

Intelligence is king when it comes to responding rapidly to geopolitical shocks and protecting national resilience. For instance, Vietnam and Taiwan were both quick to close their borders to China in response to the emergence of COVID-19 in January 2020 on the basis of intelligence. The UK Government should increase its intelligence budget and increase resources to monitor conventional and unconventional geopolitical threats to the UK.

The UK Government should review rules regarding stockpiling, ensuring that stockpiles remain located physically in the UK and are run by trusted providers. In the COVID-19 pandemic, the UK found that its emergency PPE stock based in France was nationalised by the French Government, and it struggled to procure COVID-19 vaccines located in a warehouse in the Netherlands.

The Government should review its procurement and investment rules regarding companies operating critical national infrastructure or sectors which are vital to the UK’s resilience, including steel, energy, water, and agriculture. This should include reviewing ownership structures, rules regarding profit limits, the case for the Government maintaining golden shares, and measures that can be taken to promote national champions. The recent closure of UK steel furnaces owned by Chinese and Indian companies, the closure of an oil refinery in Grangemouth, and ongoing systemic issues with private ownership of the water industry, highlight the need for the Government to adopt a cohesive new approach to the management of critical national infrastructure.

The Cabinet Office’s resilience planning should work on the basis of significant global competition and demand for resources at a time of geopolitical crises, which will place a significant strain and drive up the price of global imports and goods. The Minister for Economic Security should also sit within the Cabinet Office and have at their disposal the central machinery of Government to coordinate departments.

The Government should prioritise the long-term benefit of resilience over short-term economic gains in selling off assets. This should include requiring the Treasury to count the long-term value of assets in times of a crisis. For example, there would have been significant cost differences between the Government utilising its own properties to create vaccine centres during COVID-19 and having to rent out space from third parties.

The Foreign, Commonwealth, and Development Office’s review into the UK’s economic capability in diplomacy should include diplomats not only encouraging the Government’s growth agenda but monitoring geopolitical risks to the UK economy. UK diplomats should also prioritise “Win-Win” partnerships with close partners who are in a similar boat and seeking to bolster their own national resilience.

Ministers' plans to push regulators to prioritise growth should be underpinned by a focus on resilience, to ensure that deregulation does not undermine the UK economy and living standards. Efforts to deregulate the City of London have widely been cited as a contributing factor to the 2008 Financial Crisis.

The Government should revive public messaging regarding civil contingency, encouraging households to store non-perishables and water. It should also consider the introduction of a Civil Defence Force to coordinate civil Defence duties and supplement the work of the Armed Forces. 

The Government should ensure that planned increases in Defence spending support the resilience of the UK economy, including contributing jobs, maintaining and developing the UK’s industrial base, as well as keeping open trade chokepoints. Increased defence spending could be supported by the creation of a defence security and resilience bank to support the financing of this activity.