HAMISH MCRAE: The City is saving our economy and UK could lead Europe
Here's a surprise. According to the International Monetary Fund (IMF) in Washington DC, the UK is once again the fifth-largest economy in the world, ahead of India instead of behind it.
It was a story that was rather overlooked amid all the downgrading of our growth prospects for this year, the surge in inflation as a result of the war in the Middle East, the IMF saying that we would be harder hit than any other major economy, and so on.
And, to be fair, the calculations that downgraded India were largely the result of a statistical glitch. Still, the data tells an interesting tale about the position of the UK economy right now, and its prospects for the next decade.
Here are two headlines. One is that the UK economy is much larger than that of France, and is on course to overtake Japan.
The other is that on present trends, it is quite plausible that the UK will actually become Europe's biggest economy in another 15 years, passing Germany. At the moment the pecking order is the US, by far the largest with a GDP of over $32 trillion, China with nearly $21 trillion, then Germany at $5.45 trillion, Japan $4.38 trillion, the UK $4.26 trillion, India $4.15 trillion, and France $3.6 trillion.
But Japan is growing very slowly, and while the IMF is not particularly bullish about the UK, it reckons that we will pass it in 2029. As for Germany, that is much more speculative, because the Fund does not make any projections beyond 2031. But the gap is expected to narrow over the next five years and if that trend continues we should be getting close to Germany by 2040. What does all this mean? First, let's be clear: this has nothing to do with our present government.
In the frame: It is quite plausible that the UK will actually become Europe's biggest economy in another 15 years
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These are long-term trends related to the size of our working population and the structure of the economy. They are only economic projections, and economists have been known to get things wrong.
It is, however, extremely likely that India will pick up pace and pass Japan, the UK and Germany by the early 2030s to take on what is surely its natural place in the world economy as number three.
Next, we also need to be clear about the fact that this has nothing to do with Brexit. It is true that since 2016 we have pulled well ahead of France and closed the gap a bit with Germany, but I suspect we would have done that anyway. It is more the result of a really big change over the past 20 years in the structure of world trade. Global exports of goods are actually lower as a percentage of world output than they were in 2008 – 21 per cent now against 24 per cent then. But global exports of services have carried on rising, from 6 per cent to 8 per cent.
That plays to our strengths. We are up to 59 per cent of our exports being in services rather than goods. That's the highest proportion of any major economy in the world, second in absolute terms to the US. This is partly banking, insurance and securities trading, but it is also other associated areas such as management consultants, lawyers and high-tech entrepreneurs. Rachel Reeves should be on her knees thanking the City for saving the economy. Put bluntly, the Chinese can probably make better electric cars than the Germans, and certainly cheaper ones, but they can't produce more trusted barristers, solicitors and judges.
That is not to say that manufacturing doesn't matter or that we shouldn't extract more oil and gas from the North Sea. They are enormously important. Besides, we do have a competitive advantage in top-end manufacturing, and if we really tried we could get close to being self-sufficient in energy. These days you don't want to be too dependent on anyone.
But there is zero room for complacency. We have lost a lot of highly talented people as a result of the tax policies of this government and its predecessor. There are weak points even in finance.
Last week the value of the Taiwan stock exchange passed that of London. Huh? But we do need to celebrate the fact that we are a services powerhouse. The structure of global trade is swinging in our favour and that is a huge relief in these tough times.
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