How do we measure economic growth?

The most commonly used metric for economic growth is gross domestic product (GDP) which is calculated by looking at how much is produced, how much is spent and how much is earned across a country's entire economy over a period of time. 

For example, the UK’s GDP totaled just over £3 trillion in 2025 and the Office for Budget Responsibility predicts that this number will grow by 1.4% in 2026 and 1.5% in 2027. Analysts will often divide a country's GDP by a country's population to calculate GDP per capita. For the UK, our GDP per capita is just over £53,000 per year which puts us behind countries like the United States and Germany, but ahead of France, Spain and Italy.

Is GDP the most effective way to measure economic growth?

While  GDP offers a useful macroeconomic picture for the economy, by aggregating the whole economy it often misses the sector-specific differences that make a real difference to people's lived experiences in separate parts of the country. 

Think of it as looking at a football team. The team might be performing well and scoring goals but certain individuals in the team will be performing better than others. Without analysing who is scoring the goals we might fail to understand why some of the team performs better than others. GDP per capita is like dividing up all the goals between the number of players on the team. It masks the real story. The reality is that the economy works better for certain sectors and certain regions of the country.

The neo-liberal policies of the Thatcher years saw a sharp rise in GDP growth as deregulation delivered an economic sugar rush. But research by the Institute for Fiscal Studies found that the UK’s Gini Coefficient - the measure of inequality within an economy - also rose sharply during that time, particularly after housing costs were removed. That shows that the fruits of economic growth have not been shared equally throughout the economy over recent decades. This has particularly affected former manufacturing, mining, and other related industries in the North of England, Wales, and Scotland.

What is the K-shaped economy?

A K-shaped economy describes the different rates of economic growth between different social groups, visualising the widening gap between the rich and poor in society. But it doesn’t just allow us to explore which groups are getting richer. It also shows us to see the vastly different experiences each sector has within an economy.

Figure 1: Change in the value of exports in goods and services from 2010 to 2024 (Office of National Statistics)

We can see that the recovery of the service sector and the goods sector since COVID-19 has been drastically different. This has been exacerbated by the UK leaving the EU at the start of 2020; making it much more difficult for British businesses to trade with our largest trading partner. 

Moving physical goods across the UK-EU border has become a far more bureaucratic and expensive process, particularly affecting small and medium size businesses. The damage has been stark. Around 20,000 small businesses have stopped trading with Europe, according to the London School of Economics, while export value to the EU has fallen by £37 billion.

Figure 2: Change in the value of exports to the EU in goods and services from 2010 to 2024 (Office of National Statistics)

Figure 2 shows how strong growth in service sector exports to the EU is partly offsetting the decline of the value of goods exported to the trading bloc. As services are not liable to physical checks at borders, the effect of Brexit trade barriers has been felt less by this side of the economy. The above graph also shows how misleading taking a whole-country approach to data can be. If we were to just look at the total value of exports to the EU then exports would appear stable. In reality, Brexit has pulled the rug from under many British goods exporters.

Why does it matter?

The UK’s manufacturing sector has long been concentrated in places like the Midlands, the North West and Yorkshire, whilst most of the service sector is found in the South East and London. For example, the City of London - a small area of just over a square mile within London - produces £109 billion for the economy annually and employs 678,000 people. Between 2019 and 2023 the number of jobs in the City of London grew by 25%. A sharp contrast to the near 5% drop in employment in the manufacturing sector nationally over the same period.

The financial sector has long pushed back against further alignment with the EU. However, such alignment remains vitally important for Brits involved in manufacturing. In fact, despite the political prioritisation given to 'the City', the latest House of Commons report shows that manufacturing outperforms Britain's finance and insurance sector in terms of value added to the economy (9.1% vs 8.8%). Even more importantly, manufacturing jobs account for more than double those in the finance and insurance sector (7% vs 3.1%). By holding up negotiations for deeper alignment in goods and services with the EU, the financial sector is limiting the potential for a far greater number of employees, whose future employment depends on breaking down trade barriers with our largest export market.

The K-shaped economy is crucial for visualising the increasing regional inequality throughout the UK. Areas which were once the beating heart of the British economy are increasingly on the periphery of growth and prosperity. That is why Frontier Economics's report, commissioned by Best for Britain, took a regional perspective on the impact of deep alignment with the EU on both goods and services.

Aligning the economy

The report found that deep alignment on goods would most benefit the areas like the North West, Yorkshire and the Midlands, helping to redress the regional inequality exacerbated by leaving the EU. These areas are the ones that feel ‘left-behind’ by a Westminster class that has not delivered economic growth for them and their communities. These post-industrial areas are the ones most likely to be suffering with the cost of living crisis, and are the areas where Nigel Farage’s Reform UK has built its strongest support.

The K-shaped economy exposes the contrasting experiences of the goods and services sector after COVID-19 and Brexit, it reveals an economy that has become increasingly reliant on London-centric service-led growth at the expense of regional balance and investment across the Midlands and the North. This reliance may have begun under Margaret Thatcher, but it has reached a new peak thanks to Boris Johnson’s botched Brexit deal.

The government must act to reduce the barriers of trade that are disproportionately affecting British goods exporters. If it fails, it risks deepening the mistrust in politics that has pushed Reform UK to the top of recent polls. Deep alignment with the EU on goods is a crucial first step to revitalising these regions, bringing back investment into British manufacturing that has fallen away since the 2016 referendum, and creating jobs in the parts of the country that need them most.