Britain’s problem is not just economics. It’s belief

Britain has spent much of the past decade talking itself down. The dominant story is one of decline: weak growth, stagnant productivity, brittle public services and a politics that seems permanently stuck. Some of that story is deserved. But not all of it. And when pessimism hardens into orthodoxy, it starts to shape outcomes. That is one of the central arguments in Fixing the holes in economics: better theories for better growth, a recent paper by David Halpern, which reminds us that economies do not move on fundamentals alone. Sentiment, trust and momentum matter. Markets respond not just to policy, but to how credible and confident the story around that policy feels.

This matters for the UK because, relative to other advanced economies, the fundamentals are stronger than the mood music suggests.

Start with living standards. After years of erosion, real wages in the UK are finally rising again, by around two to three percent over the past year. That may not yet feel transformative for many households, especially after such a prolonged squeeze, but it matters in direction if not in drama. Set alongside falling inflation, easing energy prices and the prospect of lower mortgage rates, it marks the beginning of a shift. Britain is ahead of several comparable economies where incomes remain flat. This is not an abstract statistic. Politics follows pay packets. When people stop feeling poorer year on year, behaviour begins to change. Confidence returns slowly, but it does return.

Second, Britain’s service economy is often misunderstood. There is a persistent tendency to see services as a consolation prize for the loss of manufacturing. In reality, services are where much of global value is now created. The UK is the world’s second largest exporter of services, selling more than £450bn a year across finance, professional services, technology, culture and education. In a world driven increasingly by ideas, data and trust rather than containers and steel, this is a strategic advantage, not a weakness.

Third, inflation has fallen sharply and will continue to fall. From double digits in 2022 to tracking to two to three percent in the next 12 months. The UK has moved faster than many expected. That matters because it restores room for manoeuvre and It allows interest rates to fall sooner, eases pressure on households and businesses, and helps move politics out of permanent crisis mode. Compared with economies where inflation remains stubbornly high, Britain now has options again.

Fourth, institutions still count. London remains the world’s leading international financial centre, handling over 40 percent of global foreign exchange trading. British banks are well capitalised. The legal system remains trusted. These things are easy to take for granted, until you look at countries where they are missing. Trust in institutions is not a nice-to-have; it shapes expectations and behaviour long before policy changes feed through.

Finally, demographics. Britain is ageing, but less severely than many of its peers. Countries such as Japan, South Korea and parts of southern Europe are already seeing their working age populations shrink. The UK is not. That does not guarantee prosperity, but it reduces one of the most powerful structural drags on growth that others now face.

None of this is an argument for complacency. Britain still needs reform, investment and a clearer long-term strategy. But pessimism is not realism. It is a position, and often a lazy one.

The lesson from behavioural economics, as Halpern argues, is that narratives shape decisions. Businesses delay investment when they fear the future. Households hold back spending when they believe decline is inevitable. Governments that talk their own economies down should not be surprised when confidence evaporates.

Momentum is not magic. But it is real. And relative to other markets, Britain has more of it than we currently allow ourselves to believe.