The UK as number one

Since the 1960s Germany has had the largest economy in the EU but Nigel Griffiths, the UK trade minister, thinks all that might change :

“I think that construction and manufacturing alone as sectors could ensure that within 10 years we [the UK] overtake the German economy. We’ve got to see whether we cannot become the third biggest economy in the world* in terms of gross domestic product. I think that is feasible.”

Now before our British readers start singing ‘Land of Hope and Glory’ and waving their Union flags, an important point. He’s talking rubbish.

Ok it’s not complete rubbish, for it is true that the UK economy has gained ground on the Germany economy. After German unification, when the addition of East Germany (as unproductive as it was) boosted Germany’s overall GDP, the UK economy was only 61% as large as the German economy. Today, according to the IMF the UK economy is about 70% of the size of the German economy (when measured in Purchasing Power Parity, which corrects for short-term exchange rate fluctations. In market exchange rates it is about 73% of the German size).

But it is rubbish, nonetheless. To go from 70% or 73% to over 100% is a much tougher task than to go from 61% to 70%. It would require the UK to grow faster than the German economy by over 40% over the next ten years, or an annual growth rate of 3.6% higher. This would be difficult enough over ten years if the German economy remained stagnant, but assuming as in the past a sluggish but growing German economy it would require the UK to grow at nearly 5% a year.

You do not need to be a student of British economic history to know that this is unlikely. The UK rarely manages 2.5% to 2.75% per growth a year over a sustained period. Thus only if the German economy entered a recessionary period and contracted over the ten years would Griffiths’ aim be feasible, and given the knock-on effects on the UK it would still be highly unlikely even in this doomsday scenario.

All-in-all then, Griffiths is fantasising about the UK overtaking Germany. This is a common British trait, notably 1980s Chancellor Nigel Lawson’s ‘economic miracle’ (which ended in double-digit inflation and over 3m unemployment), and the (particularly apt) famous claim by John Major in 1992 that he expected the pound to replace the Deutschmark as the strongest currency in Europe, just a few months beore the pound plunged by 20% taking Major’s premiership with it.

In the meantime it would perhaps be a good idea (as he obviously cares so much) to watch out for the UK slipping to third in Europe, not first. For France, will for the first time since 1999 have a larger economy on a market exchange rate basis if the euro averages 0.70 sterling or higher during the year. We’re currently on 0.694.

* I’ll concentrate on whether the UK could overtake Germany, not whether it could become the world’s 3rd largest economy. Otherwise we would need to mention China, which Griffiths seems oblivious to but which already has a larger economy in PPP terms, and soon will on market-exchange rate measures if current trends continue (it stood at end-2002 at 81% the size of the UK).

11 thoughts on “The UK as number one

  1. My first thought after doing some rougth mental calculation was “if UK ministers are so good at calculus, it’ll never happen”. Thanks for bringing back to memory the Lawson and Major moments of British economic supremacy fantasy. Is this phenomenon somewhat related to the we-will-win-the-world-cup syndrome?

  2. “In the meantime it would perhaps be a good idea (as he obviously cares so much) to watch out for the UK slipping to third in Europe, not first. For France, will for the first time since 1999 have a larger economy on a market exchange rate basis if the euro averages 0.70 sterling or higher during the year. We’re currently on 0.694.”

    But on a PPP basis, Britain still remains third in Europe. I expect the gap between British and French per capita GDP* to continue to widen indefinitely into the future, assuming the Labour Party doesn’t do too much damage, and the French political class continues to display the same lack of courage that it exhibits at present.

    Nigel Griffiths may be a victim of over-optimistic thinking, but it isn’t ridiculous to believe that British income per capita* will not only soon catch-up to, but actually surpass, that of the Germans as well, restoring matters to how they were for most of modern history until the 1960s. There is an economic price to pay for Continental-style social democracy, and France and Germany are paying it.

    *On a PPP basis, of course.

  3. On a per capita PPP basis, it’s not insignificant that 16 million East Germans were way behind EU standards when they became members overnight at unification.

    The German economy has plenty of flaws, but any way you slice it bringing Eastern standards of living even within shouting distance of Western ones is a substantial historic achievement. I’m really not sure that any other EU economy could have managed the feat.

  4. Abiola, on a PPP basis according to the IMF France is ahead of Britain still but I agree that should change at the end of this year if growth rates are maintained. And yes it is possible that the UK will overtake Germany in per capita basis but that’s not what Griffiths was saying, and as Doug points out it has a lot to do with unification.

    On a wider point about Germany it’s always noticeable that the City analysts and journalists in Britain who make out the German economy is close to collapse then drive home in their expensive German cars, get food out of their expensive German fridges to cook on their expensive German cookers before washing up the dishes in their expensive German dishwashers. I think there’s life in it yet.

  5. I should have added that of course PPP measurements are inspired guesswork, so it’s possible that (say) the OECD’s might have a different ranking.

  6. “I should have added that of course PPP measurements are inspired guesswork”.

    Exactly. I have seen a graph recently comparing the evolution of US and European GDPs in the 80’s and 90’s. The Dollar rate against the different European currencies varied widely during that period (from above 3.20 $/DM to under 1.50 $/DM for example). PPP adjustment was just barely diminishing the massive swing in exchange rate variation. Guesswork? I’d even say sophisticated illusion.

  7. “Thus only if the German economy entered a recessionary period and contracted over the ten years would Griffiths’ aim be feasible, and given the knock-on effects on the UK it would still be highly unlikely even in this doomsday scenario.”

    In one sense you’re right, he’s being extremely silly. But don’t write off the above possibility too quickly. If, as seems possible, Germany enters a deflationary growth slowdown this winter, then it’s anyone’s guess how they could get out. With fiscal constraints and euro-wide interest rates they won’t even have the policy options Japan has been trying, let-alone ‘helicopter money’.

    Of course the other part of the equation is what is going to happen to the UK. I think we’ll have to wait till after the housing boom unwinds to know that.

    “who make out the German economy is close to collapse then drive home in their expensive German cars, get food out of their expensive German fridges to cook on their expensive German cookers before washing up the dishes in their expensive German dishwashers”

    Of course the same could be said about Japan, and that doesn’t stop me having a Fujitsu flat screen etc. There’s a difference between making some good products, making money out of those same products, and achieving GDP growth. The China skepics (of which I am not one) make precisely the same point about China: that they make good, loss-making products.

    The real crunch factor is that Germany has a population momentum of 0.88 (the lowest in Europe, Italy is next with 0.91) and is not especially ‘immigrant friendly’. Momentum is important (you need 1.00 to have a stable population). This is quite technical, but basically what it means is that even if (miraculously) they get back up to the magic 2.1 fertility, there are decades of a contracting and ageing population ahead. With the wind behind them, and a bit of luck, the UK might just do it.

    Would it be vulgar to suggest that multiculturalism, apart from being admirable, actually has a cash-in value.

  8. Edward Hugh said: “Germany […] is not especially ‘immigrant friendly’.”

    This is a myth. Germany has experienced vigorous immigration since the mid 80’s, much more than the UK, even more than the US in relative terms. While Germany is introducing the same type of legislation as classical countries of immigration (Australia, Canada, New Zealand, USA) the UK is thinking about testing “Britishness” – what country is really immigration friendly? More than twice as many foreigners naturalize to become German than to become a Briton. Since most people think “racial purity” when Germany and immigration are mentioned this reality has been lost on pretty much everybody.

    Figures for net immigration:
    Germany: http://www.migrationinformation.org/GlobalData/countrydata/graph_netm.cfm?Country=Germany
    UK: http://www.migrationinformation.org/GlobalData/countrydata/graph_netm.cfm?Country=UK
    US: http://www.migrationinformation.org/GlobalData/countrydata/graph_netm.cfm?Country=US

    Figures for naturalization:
    Germany: http://www.migrationinformation.org/GlobalData/countrydata/graph_actot.cfm?Country=Germany
    UK: http://www.migrationinformation.org/GlobalData/countrydata/graph_actot.cfm?Country=UK

    Lots of excellent information on immigration: http://www.migrationinformation.org/

    P.S.: is there a way to insert the href tag within the text without MT wiping it out?

  9. Hi Chris

    If its a myth I’m happy. But I’m not entirely convinced. None of your politicians seem to be advocating immigration as an explicit policy to address your population problem.

    Ironically, it in Europe’s southern fringe – Greece, Spain, Portugal – that politicians seem to be more open to this idea.

    The statistics between UK and Germany are difficult to compare, since until recently you have had a nationality law based on blood. You will note that in the UK, the children of the earlier immigrants are not classed as ‘foreign’.

    The impression I have comes from reading Die Zeit, and noting the unfortunate problems that a lot of Turkish families still appear to have getting legal status for their children.

    Indeed, the issue of Turkish membership of the EU appears to be a possible election issue in Germany, and the CDU seem to explicitly oppose the idea of opening up Germany as a multicultural society.

    Or again, look at the difficulties put in the way of the Indian ‘boys on the IT bench’ when it came to temporary visas.

    Or look at the different attitudes of the UK and German governments about Eastern accession country migrants.

    You mention ‘Britishness’. I think this is the point. If you look at Tony Blairs speech about ‘Britishness’ at the time of the ‘crazy bomber’ you will notice an inclusive definition. This is a big change from when I was young, when British was virtually synonymous with English. Or look at Robin Cook and Chicken Tikka Masala as the new national dish. ‘German-ness’ hasn’t changed to anything like the same extent. And if you want a little piece of anecdotal evidence, trying looking at the respective national football teams next time they’re on TV.

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