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Why Britain’s economy will overtake Germany’s

Our population’s growing – and we’re not in the eurozone

5 October 2013

9:00 AM

5 October 2013

9:00 AM

What’s the most surprising thing that could come out of the current economic upturn? A rapid revival in northern manufacturing? The City really getting behind small British businesses? Ed Balls admitting higher public spending wasn’t always the best way to promote growth? Any of these eventualities would be fairly amazing. But the biggest surprise would perhaps be this: a gradual realisation that the UK is on track to become the largest economy in Europe.

In the 19th century, at the height of the industrial revolution, the UK outproduced all of its European competitors. It steadily lost that position, however, ceding industrial leadership to the Germans and the French. In the next couple of decades that pattern will start to reverse. As the recovery gathers steam, we are likely to out-perform the rest of Europe. And that will change the way this country is perceived, both by global businesses and by investors.

The rankings of European economies are not set in stone. Right now, Germany is by far the biggest, with a GDP of $3.6 trillion. France stands at $2.7 trillion, the UK at $2.2 trillion, Italy at $2.1 trillion. If you count Russia as part of Europe, it slots into the table between us and the Italians. But over time, those positions have moved around. Back in 1987 the Italian economy overtook ours, a moment celebrated in that country as ‘Il Surpasso’, and indeed in the early 1990s Italy even overtook France. A couple of difficult decades later, Italy and Britain are tussling for fourth place.

The next decade will be a lot better for us, however. Our recovery may look tepid by historical standards; the mountain of debt, public and private, is too enormous for a rapid acceleration of growth, and there is little sign of a surge of productivity to kick-start a really strong upturn. But that’s not the point. As Alan Hansen likes to point out on Match of the Day, to move up a league table you don’t just need to pick up points yourself — you also need your competitors to drop a few. And that is what’s about to happen.

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If UK growth hits 1.5 per cent this year and 2 per cent next, that will be better than most people expect. But the eurozone has locked itself into what looks like a permanent recession, each minor burst of growth followed by a fresh downturn. And over time, that will change the rankings of the largest economies.

Italy, in its fifth recession since joining the euro, is not going to catch the UK up again. The Italian economy is no bigger now than when it joined the single currency in 1999. The OECD predicts it will shrink by 1.2 per cent this year, and only expand by 0.5 per cent next. France does not look likely to hold on to second place in Europe for much longer: it spent the first half of the year in recession, and has emerged from it only as far as an annual growth rate of 0.1 per cent — more of a rounding error than an expansion. Socialist President François Hollande seems to be doing everything he can think of to destroy wealth, from punitive income tax rates to lowering the retirement age to taxing smartphones. The Centre for Economics and Business Research has already predicted the British economy will be bigger than the French by next year.

But Germany? That really is a serious economy — Europe’s largest both before the first world war and since its recovery after the second, partly because Germans are very good at making stuff, but also because there are a lot of them — 82 million, compared with 62 million Britons. But even Germany is getting sucked into the eurozone’s depression. It was growing at just 0.1 per cent at the start of the year, and has recovered only slightly since then. Germany is the only eurozone economy still in respectable shape — but with even the Dutch next door in recession, that can’t last. The reality is that Germany is fated to a decade or more of faltering output just like its neighbours. If the UK starts to grow consistently faster than Germany, the gap will close.

There is another, more important factor. From 2015, Germany will have a sharply declining population. By 2020, it will have 80 million people, according to the Federal Statistical Office. By 2060, that will be down to 64 million. By contrast, the UK by 2050 will be home to 80 million, according to a report last year by the Population Reference Bureau. It would require miracles of productivity in terms of output per worker for Germany not to lose ground.

The French have already noticed. The state-sponsored French Economic Observatory recently published a paper on these changing demographics, forecasting that the French economy would overtake Germany by 2040. That’s very likely. But as you might expect, the French study left Britain out of the equation.

In fact, the UK and France are the only two European countries with healthy demographics, and the contest to be Europe’s largest economy will be between them. But with its state-heavy, over-regulated model, locked into a struggling single currency, heavily dependent on a shrinking German market for exports, it’s hard to believe France can outperform us. If the UK manages to combine faster growth with better demographics, we should overtake Germany somewhere between 2025 and 2030.

That will have big consequences. A region’s biggest economy attracts people and investment. Every multinational will want a stake in the British market. Migrants will flock here in even greater numbers. Global investors will be hungry to own British stocks. And it will make the UK a far more powerful voice in European politics — money talks. Our recovery so far may not feel very exciting, but if we do better than our neighbours, one day soon we’ll have something to celebrate.

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