THIS WILL BE the first in a short series of essays leading up to the budget exploring the current state of the UK economy.
The first paper deals with the staggering economic decline of the UK and indeed the entire European continent not just globally but relative to other advanced nations be it the US, Australia, G7 or even Canada.
The charts which are sourced from the UK Office of National Statistics (ONS), World Bank, or International Monetary Fund (IMF) need little explanation. The first three charts are based on per capita Gross Domestic Product, as the wealth per head is much more relevant to the individual with the last looking at aggregate GDP. In each case the trend is clear and well established.
Ultimately while GDP is just a number and of course a crude average it really matters as, without improvement, empires are won and lost on economic power and frankly this will be the last generation where either the UK, or indeed the continent of Europe, has much influence or indeed relative prosperity – so dramatic are the global shifts.
We are genuinely becoming northern hemisphere Argentinians but without Javier Milei. That might sound a bit extreme but draw your own conclusions from the charts!
Subsequent essays will deal with why the decline, what will Labours likely response be and will it work? Finally, we will look at the how. How could we do rather better? And the good news is its not yet too late for it can be turned around.
What has happened since 2010?
Since the industrial revolution trend per capita (per head) economic growth in the UK has been remarkably stable at around 2.3% each year. The chart below shows UK GDP per head since 1955 and the trend line fit is near perfect until 2010.
According to the ONS in 2010 UK per capita GDP was £29,518. Today it stands at £33,271 an increase of some 12% over 14 years. The problem is if the economy had grown at the long-established historic trend of 2.3% GDP per head would have been around £45,000 today, or some £13,000 each more. That is a staggering loss of wealth.
Worse, current GDP per head has barely improved in five years. This is unprecedented and to my knowledge is the weakest performance since records began well over 200 years ago.
Many excuses for this dreadful performance have been given. Some have credence, or certainly have influenced the outcome, although in each case the path selected was a matter of policy choice. Lockdowns, the blow back from the global financial crisis and subsequent monetary response, and the impact of the war in Ukraine have of course been instrumental.
Other excuses for the poor performance are more eccentric and generally based on the notion of perceived underinvestment of the public sector, or the impact of Brexit. I will deal with these excuses in the next paper, for to have any hope of achieving a cure we must accurately assess the nature of the problem.
However, regardless of one’s perspective, the UK operates in a global environment thus the impact of lockdown, Ukraine and the global financial crisis was being felt across the globe, albeit to varying degrees, as differing responses were developed. Thus, the usual excuses for poor performance are not that valid when comparing the UK’s relative performance with others.
Poor growth is not a developed world problem, it’s a European one. The UK is choosing to be poor.
So, if the UK has seen GDP growth per head stagnation has this not effected most other countries? How has the UK done by international comparison?
The chart below compares GDP per head in US Dollar terms of key developed nations ranked in descending order by decade since 2000. As the Millenium bells struck in 2000 the UK was in quite a strong place bettered by only Switzerland, the US and the G7 average (which in itself was influenced by the large US weight in the G7).
Today, of the major nations examined only France and the Euro Area are poorer per capita than the UK. Notably Canada and Australia have powered ahead with Australia in particular now 32% richer per head from an inferior position just a generation ago.
If we simply look at how the UK and US have performed since 1980 the position is even starker. In 1980 US standards of living were not so far away from that of the UK with the average American 16.9% richer.
Today the average American is 66% richer. Today only one US state, Mississippi, has a GDP comparable with that of the UK, with the other 49 states of the Union all more prosperous and most materially so. If one also considers that energy bills are about a third of that in the UK and like-for-like property costs are generally much lower the differential is stark indeed. America is now a different planet and has utterly left the UK behind.
The economic decline of the UK is mirrored across the EU in particular but also to a lessor extent the West in general. The chart below looking at purchasing power parity GDP expressed as a proportion of global GDP shows how rapidly the sands of economic power are shifting.
Global wealth was dominated by the OECD in 1990 which accounted for over almost 62% of entire global GDP and 3.5 x that of the then developing East Asian region. China was irrelevant at just 3.1% of global output. Today, while the OECD remains the dominant global bloc, its power has shrunk to 44% of global output with East Asia at almost one third snapping on its heals.
China from nowhere is now, according to World Bank data, the globe’s largest economy. The EU’s global weight has reduced from almost one quarter to virtually one seventh since 1990, with no signs that the trend is abating. Indonesia’s purchasing power parity GDP is now judged to be greater than the UK’s.
Of course, the above statistics only tell part of the story. China may have a greater GDP in purchasing power parity terms than the US but it has around 1.4 billion citizens compared with just 330 million in the US or the 440m in the EU. We remain richer per head by far but the point remains that relative position is under severe challenge and declining fast.
GDP also says nothing of the array of other assets nations possess from soft power, diplomatic influence, the rule of law, property rights, a stable political environment and ultimately hard power. Historically most would have said Britain performed well at these soft assets. The operative in that sentence being historically.
The US has massively widened its lead per head over the UK while our little cousin Australia, not to mention Canada, has materially powered ahead. Sure emerging countries can grow rapidly from a low base in an age of technology transfer, but there is no good reason for the UK and EU’s desperate underperformance.
In the UK’s case the last five years have been per head the worst in 200 years. Repeat, the worst. This really matters as ultimately all the nice things from high art to music, philosophy and scientific discovery are closely linked to wealth, and our relative position is currently and unambiguously in structural decline.
The next article will examine what has been different about the UK (and EU responses) to produce such a global outlier – the failed region – relative to the rest.
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