Without a proper plan, stagflation will be the least of Britain’s problems | Larry Elliott

Inflation is back with a vengeance. The cost of living has not been rising this fast since the Falklands war. Prices are climbing faster than wages. In every respect bar one, this is clearly bad news. The best that Britain can hope for in the months ahead is a period of stagflation: weak growth and rapidly rising prices. If things get really bad, we could be on course for an “incession” – high inflation combined with a recession. Either way, the outlook is grim, especially for those on the lowest incomes, who spend most on energy and food, for which price increases are heftiest.

The one consolation is that high inflation acts as a national wake-up call. Or at least it should do. For far too long, the UK has drifted along convinced that all is well because cheap imports from China are keeping inflation low and rock-bottom interest rates are fuelling a house-price boom. It would be nice to think we have finally woken up to reality. But that in itself is an illusion. Just as in the 1970s, the economy’s structural weaknesses have been exposed by a period when prices are hurtling upwards.

Many of the problems are the same as they were five decades ago: low levels of investment, poor productivity, a lack of international competitiveness and exports failing to keep up with imports. Depressingly, and unlike in the 1970s, nobody appears to have the first idea of how to go about solving them.

In the 1980s the radical right, led by Margaret Thatcher, and the radical left, led by Tony Benn, agreed on one thing: Britain had serious underlying failings that had been left unattended. Both politicians had an alternative strategy to the prevailing political consensus, which was to muddle through in the hope that North Sea oil would eventually come to the rescue.

Thatcher won that battle, and her ideas held sway in the decades that followed. These only really started to be challenged in the late 2000s, when free market principles brought the global banking system to the point of collapse. Yet the impact of the financial crisis was to push the political pendulum to the right. The Conservatives have been in power for the past 12 years and are faced with old, familiar problems. The current strikes, caused by high inflation, are merely a manifestation of our dysfunctional economy. If Britain were a company on the stock market, its shareholders would be agitating for change. They would be demanding precisely what is absent right now: a strategy to turn the business around. Six years after the Brexit vote, this strategy is yet to materialise.

The government’s big idea is levelling up, which partly acknowledges there is a problem that needs to be addressed. But in order to be effective, this plan needs to be backed with some serious investment, and to form part of a coordinated strategy not just to increase the size of Britain’s manufacturing base but to develop the industries of the future. Neither the money nor the over-arching strategy are there. And Labour is not offering much beyond platitudes either. Sir Keir Starmer’s approach is to keep his head down and hope voters don’t ask too many questions about what he would do differently as prime minister.

Here’s a brief outline of how things stand. Britain produces more manufactured goods than it did in the 1970s, but industry’s share of the economy has fallen to less than 10% and is the smallest in the G7 group of rich countries. Most of the goods we buy – TVs, washing machines, mobile phones – are imported and have been for decades. Not since the early 1980s has the UK run a trade surplus in goods. The deficit as a share of the economy is on course to be the highest this year since the 1970s.

Britain also has the lowest share of investment of any G7 country, which is not altogether surprising given its relatively small manufacturing sector. The availability of cheap labour has also meant any increase in demand for a company’s products can be met by hiring more workers rather than by investing in new kit. Weak investment contributes to the UK’s poor productivity, which lags behind the US, Germany and France.

There are some sectors where Britain is internationally competitive, financial and business services foremost among them. These centres of strength tend to be concentrated in London and other big cities such as Edinburgh and Leeds. Geographically, Britain’s prosperity is concentrated in the south-east of England.

So what’s to be done? The first thing is to accept that muddling through is not the answer. Next, have a plan for how the economy should look in five, 10, 20 and 30 years’ time. The central idea should be an economy that is bigger, cleaner and fairer, objectives that are not mutually incompatible. Once the direction of travel is established, the next task is to ensure the policies of all government departments are consistent with this strategy. That means the Treasury, obviously, but it also means the departments of international trade, business and education. All available tools should be used.

None of this is impossible. Other countries – South Korea and Taiwan, for example – have become industrial powerhouses by having a plan and sticking to it. They didn’t do so, though, by leaving everything to market forces and assuming everything would turn out fine in the end.

Larry Elliott is the Guardian’s economics editor