UK slips to relegation zone in EU growth league

Despite economic growth picking up from 1.9 per cent in Q4 2005 to 2.7 per cent in Q3 2006, the United Kingdom has slipped three positions in the European Union growth league to 22nd position — or fourth bottom — over the same period, reports the Centre for Economics and Business Research...

Only three countries — France, Italy and Portugal — had lower third quarter year-on-year growth. With 2.8 per cent growth, Germany beat the United Kingdom to 21st place.

Unsurprisingly, as they catch-up economically, the fastest growing countries in the year to Q3 2006 were Estonia, Latvia and Slovakia. Surprise high performers include Finland (5th), Luxembourg (8th), Ireland (10th) and Sweden (11th). Finland — the highest ranking non-accession country recorded 6.6 per cent real growth in Q2 2006 whilst Luxembourg recorded 5.4 per cent — double that of the United Kingdom.

EU bouncing back
Assessing the United Kingdom’s performance so far through 2006, it appears to have done well when compared with 2005. However on another measure — the comparison against other countries in the same economic union of which the United Kingdom is a member — its performance looks rather weak, and for the first time in a long time. The question is why.

On one side of the argument continental Europe’s come back has proved rather spectacular. Apart from the boost from the World Cup (which also lifted growth in the United Kingdom) most countries, including Germany, the Netherlands, Finland, Sweden and Austria are bouncing back following very weak growth in the first half this decade. During that period they cut their unit costs, boosted productivity and their successful companies (such as Nokia, Siemens, BMW, Ericsson, SAP and Philips) have made the most of trade growth within the European Union and the growth in Asia and Latin America. As such, the European Union is becoming more of a specialised economy with member states doing what they are best at, and we are starting to see the benefits of this.

UK has a role to play
The United Kingdom clearly has a role to play in this big economy by being the European leader in finance and business services, just as the Germans lead the European car industry and the Finns the telecoms industry. In the United Kingdom the financial sector expanded 7.7 percent in real terms in the year to Q2 2006, and business services 6.6 per cent. So why has its economic upswing fallen short of the continent’s?

The main reason for this — which is the other side of the argument why the United Kingdom has slipped to fourth bottom — is that the United Kingdom has, other than in finance and business services, failed to improve its competitive position in the world economy in recent years. Business investment barely grew in the three years to 2005, whilst the government sector crowded out the labour market, raising labour unit costs — in contrast to the continent. Fundamentally, despite the migration inflow, the United Kingdom has failed to invest in its capital stock despite the migration boost: real net capital stock growth declined from 2.6 per cent in 1998 to 2.2 per cent in 2005 and 52 per cent of all jobs created between 1996 and 2006 were in public services.

Looking at the European Union growth league table, few of us one year ago would have expected the United Kingdom to be in the relegation zone, given the continent’s lacklustre performance. Yet despite the boost to productivity and the size of the labour force from immigration and the strides being made in finance and business services, the United Kingdom has so far failed to adequately grow its asset base. As a result, with productivity growing faster on the continent, it now seems a fair bet to make that the United Kingdom may remain in the relegation zone in the next few years. Good thing there is no second division...