EU referendum result: Has the French economy really overtaken the UK in size since last night?

Almost certainly not

Ben Chu
Friday 24 June 2016 15:52
A view of the Eiffel Tower
A view of the Eiffel Tower

Has the plummeting value of the pound, which sank to a 31 year low against the dollar last night, meant that the French economy has now overtaken the UK’s in size?

The claim has been around today on Twitter and a couple of newspaper websites.

It’s a good line, not least because of the Brexiteers’ frequent citation of the fact that the UK is the world’s fifth largest economy. It would be ironic if the expectation of Brexit had nullified one of their favoured statistics.

But is it true? Has the turmoil in currency markets cost us a position in the global economic pecking order?

Almost certainly not.

First, we should remember that the size of an economy is not measured in real time in the way that currencies and company share prices are.

We have an estimate of UK GDP up to the end of the first quarter (the end of March) of 2016 from the Office for National Statistics. And the French statistics agency data up to the same point.

So according to the ONS UK GDP, in current prices, that quarter was around £473bn. And according to the French office France’s current GDP was €555bn.

Convert that UK figure into euros at today’s exchange rate of €1.24 per pound (which is down by about 5.5 per cent on yesterday due to sterling's capitulation) and British GDP is €586bn.

So still around 5.6 per cent higher than France’s.

(It's also rather unlikely that France's economy grew by 5.6 per cent in the second quarter of 2016 to close the remaining gap)

France still not bigger....

But does a single quarter of output represent the size of an economy in any case? Usually, these things are measured by looking at a year’s output or GDP.

Andrew Goodwin of Oxford Economics has looked at the annual data, with them both converted to US dollars for convenience, for The Independent and he says UK GDP in 2015 was $2.85 trillion and French GDP was $2.42 trillion.

“That’s a difference of almost 18 per cent” Mr Goodwin says “so while they may have very briefly crossed this morning when sterling reached its 31-year low (though I’m not sure they actually did), sterling’s subsequent rally means it certainly won’t be the case now. And that’s before we get onto whether converting at market exchange rates is an appropriate thing to do!”

He adds: “Market exchange rates are far too volatile and a lot of the time any changes in the rankings merely reflect FX movements rather than a genuine change in the relative performance of the economies.”

A better measure than market exchange rates to compare the size of national economies is so-called Purchasing Power Parity (or PPP) measures. These are special adjustments for what a local currency can actually buy in terms of goods and services. So in places where your money goes a lot further, such as in poorer countries, overall GDP is also considered to be higher.

The major fall in sterling will hurt UK living standards because the price of imports will rise. But we should resist the urge, however politically tempting, to use currency swings to make GDP comparisons that are inherently dubious and which, in any case, don’t add up. There were enough dodgy statistics during the referendum campaign – let’s not carry on the practice now it's over.

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