Britain is no world-beating economy

Posted on September 29, 2016

Pretty waitress taking an order in a bar

One of Britain’s few economic ‘strengths’ is its ability to create low-wage jobs

British economic policymakers confront big challenges. They have to manage departure from the EU with the minimum damage. They also need to make the UK economy far more dynamic. The latter cannot be achieved if they do not abandon the myth that Britain is already an economic success, albeit one choked by the dead hand of an over-regulated European economy.

Simon Tilford of the Centre for European Reform provides a far more realistic picture in his Brexit Britain
. Measured at purchasing power parity, the rise in the UK’s gross domestic product per head between 2000 and 2015 was smaller than in Germany, Spain and France. Over this period, the UK outperformed only Italy, among the EU’s largest pre-2000 members. In 2015, the UK’s GDP per head was lower relative to the average of the 15 pre-2000 EU members than in 2000: its GDP per head was a mere ninth within this group.

    The UK also has the highest income inequality among these countries. Furthermore, notes Mr Tilford, UK real wages fell by 10 per cent between 2008 and 2014, before a tiny uptick in 2015, while German and French real wages rose. In 2015, only London and the South-East had higher GDP per head than the average of the EU-15 countries. Other UK regions were at or below that average. In all, it is hardly surprising so many UK voters feel left behind, as shown in the EU referendum.

    True, the increase in French real wages has coincided with high unemployment. But that is not true in Germany. UK workers also work longer hours than those in other EU-15 countries. This is presumably to make up for low real wages, themselves largely due to the UK’s poor productivity. According to the Conference Board’s invaluable “total economy database”, the only EU-15 countries to have lower output per hour than the UK are Greece, Italy and Portugal, while the UK’s productivity per hour has stagnated since 2007. Again, of the biggest five EU-15 members only Italy performed worse on this measure. The UK also now runs the largest current account deficit, relative to GDP, in the EU-15.

    The UK, then, has low unemployment. But it also has high inequality, mediocre real incomes, at least by the standards of its European peers, and poor external competitiveness. Above all, recent productivity growth has been truly awful.

    Moreover, such failings, relative to the UK’s EU-15 peers, cannot plausibly be due to the burden of regulation since, as the OECD rightly stated in its pre-referendum report on Brexit, “regulations are low relative to those in other EU member states”. If that made the difference, the UK would be more productive and dynamic than its peers, not less so. Given this, scrapping remaining regulations would not be transformative.

    Some point to free-trading Hong Kong and Singapore as models for the UK, rather than to its European peers. But these two are, first, tiny and second, far from being multi-party democracies. Singapore’s government has had a powerful role in managing the overall development of the economy. Why, above all, should these places be more relevant models for the UK than Germany, the Netherlands or Sweden?

    The implications of a realistic view of the UK economy is that, even without the looming shock of Brexit, the economy suffers from big weaknesses relative to the European economies that many Brexiters despise. Some argue that a real depreciation of sterling is mainly what is needed. If sustained, the post-referendum devaluation should indeed help, though it means a fall in real incomes and wealth. Yet devaluation alone will not cure UK weaknesses.

    Philip Stephens

    Britain sets off in search of a role – again

    epa05552215 British Secretary of State Boris Johnson speaks during a press briefing after a security council meeting on aviation security during the General Debate at the 71st Session of the United Nations General Assembly at UN headquarters in New York, USA, 22 September 2016. EPA/PETER FOLEY

    Boris Johnson looks more comfortable in the role of court jester than thoughtful policymaker

    The UK has to rectify longstanding supply-side failings. The list includes: low investment, particularly in infrastructure; inadequate basic education of much of the population and the innumeracy of much of its elite; a grossly distorted housing market; over-centralisation of government; and a corporate sector whose leaders are motivated more by the share price than by the long-term health of the business. Not surprisingly, given all this, the UK economy is highly dependent on inward foreign direct investment, which Brexit would seem virtually certain to weaken.

    If the UK is to thrive economically, it will not be enough for it to manage Brexit, hard though that will surely be. Its policymakers must also start from a realistic assessment of the UK’s mediocre performance. This is no world-beating economy. It is not even a Europe-beating economy, except on creating what are too often low-wage jobs. It will have to do far better if it is to deliver the higher living standards its people want in the tougher environment ahead.

    martin.wolf@ft.com

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