Hamish McRae: Think big and look to 2050 and our outlook is not bad
Economic Life: If you exclude the public sector, UK productivity is higher than in 2007
Thursday 12 January 2012
Behind all the angst about Britain's place in Europe is surely a wider concern about Britain's place in the world. It is partly a political issue, of course, but it is primarily an economic one. A strong and sizeable economy gives political clout should a country choose to deploy it, while a weak economy inevitably reduces political influence.
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The shock of the recession and, perhaps more so, the slow pull out of it, has left people here focusing on the small: whether GDP grew in the past three months, what can be done to encourage bank lending to small companies, whether the correction of the fiscal deficit is too fast, and so on. There is nothing wrong with this, for these are all material issues. But it might be helpful to stand back for a minute and look at the big, and in particular at how the UK might rank in the world in 2050. If that seems unutterably far away, reflect on the fact that it is when people who have recently joined the workforce will be hoping to draw their pensions.
There have been a number of studies of the likely shape of the world economy 40 years on, most notably that of Goldman Sachs, which coined the acronym Brics. Much of the attention then and subsequently was on when China would overtake the US to become the world's largest economy, with dates as early as 2018 and as late as the 2040s being cited. My own back-of-an-envelope calculations suggest some time in the 2020s, but we will see.
But this focus on China and the other Brics tends to divert attention from less headline-grabbing issues, such as the progress of the other large, fast-growing economies – Mexico, Indonesia, Turkey for example – and the change in the position of the mature developed countries.
This last point becomes extremely important when you start of think about the debts that have been run up within the European Union, not just following the recent recession but also as a result of the Continent's large unfunded pension liabilities. If you are thinking of buying 30-year Italian debt, you want to think about the likely ability of the country to redeem that debt in 2032.
A year ago HSBC reported on the world's top 30 countries in 2050 – that is in terms of the size of their economies. It has just done the same exercise for the top 100, starting with China (of course) and running down to... Cyprus. I have shown the top 20 in the chart, calculated in US dollars at the dollar's real value in 2000.
A couple of things stand out. One is that the lead that China is projected to have over the US is rather smaller than that expected in some other studies; likewise India is still well behind the US, while some projections have put it ahead by then. Brazil is projected to be smaller than the UK, notwithstanding some calculations that put it ahead in 2011. I don't want to go into the detail of all this because what you get out of the model depends very much on what you put in: quite small variations in the inputs over time deliver very large differences in outcomes. But if you want to focus simply on the position of Britain, it is interesting and mildly encouraging. We are now HSBC's number five in the world. By 2050 we go down to number six. Our economy will still be a little smaller than that of Germany and our GDP per head will be somewhat lower too. But thanks to a rising population, a function partly of inward migration but also of somewhat higher fertility, the UK (assuming Scotland is still included) becomes Europe's most populous country, with 72 million people against Germany's 71 million.
In terms of GDP per head, the UK would remain poorer than the richest European nations – Luxembourg and Switzerland. But we would be number 11 in the world, with a materially higher income per head than we have now. The popular notion that the next generation of Britons will inevitably have lower living standards than their parents does not really hold up.
Goldman Sachs has just done a study on the loss of output the UK has sustained as a result of the recession and how quickly it will be recovered. The basic point Goldman makes is that the UK economy has growth at an average of 2.5 per cent a year since the aftermath of the First World War. It had nudged a little above the trend line in 2007 and now has dipped a little below it. Labour productivity growth for the economy as a whole has fallen quite sharply since 2008 and has yet to recover to its past peak.
Many people have assumed that there has been a permanent loss of productive capacity associated with this fall in productivity. But if you exclude the public sector the picture is much better and productivity is actually up on 2007. The Goldman study argues that the outlook is more positive and productivity growth will speed up as the recovery gets under way. The financial sector, which has very high productivity, is likely to contribute less in the future but the contraction of the public sector will more than offset this. There will be some permanent loss of output (Goldman thinks growth in the fourth quarter of last year will come in as a minus) but not as much as people think.
My own feeling about all this is that we are all underrating the ability of any economy to adjust to different circumstances. It is right to be very cautious about this year, given all the stuff that is happening over the Channel. But longer-term the prospects are brighter. Human ingenuity works out ways of increasing real wealth.
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