Wednesday, February 11, 2009

Economy: Britain on the brink - will struggle to ever break back into the world's top 12

Britain is facing an unprecedented fall in its economic world ranking, according to a newly produced report by country risk specialists Business Monitor International (BMI). Ranked by GDP per capita, the UK is set to fall by nine places, from 12th place in 2007 to 21st in 2010.

Measuring output per capita in US dollars, a key comparative economic indicator, BMI predicts that the UK will partially recover its world ranking to 17th by 2013. But the combination of falling output and a devalued currency suggests Britain will struggle to ever break back into the world's top 12. (see full table at

The 60-page BMI report is one of the most bearish yet to be published on the UK economy. Among its key conclusions:

- Britain will suffer a far deeper recession than either the UK Treasury or IMF predicts. GDP is forecast to contract by 3.5% in 2009, followed by a shallow 0.2% recovery in 2010. Unemployment will peak at 3.2 million next year, an 11.2% rate, with the financial services sector set to lose 570,000 jobs between 2008 and 2010.

- Sterling's steep depreciation is the principle factor behind Britain's fall in the league tables; the pound will remain weak for the next three years, dragged down by recession, huge budget deficits, low interest rates and increasing political risk.

- Despite enjoying 11 years of strong growth between 1997 and 2007, the UK ran a budget deficit of 1.7% of GDP over this period, fuelling a fiscal time bomb. Faced with the financial burden of bailing out the banking sector and kick-starting the economy, the budget deficit will swell to an unsustainable 9.3% of GDP in 2009, and average 6.7% over the following four years.

- Property prices will see a cumulative fall of 41%, from peak to trough, and could take more than 10 years to recover to the levels of 2007. The impact of negative equity and declining asset values will further serve to depress consumer spending and economic growth.

In terms of recovery, BMI points out that the UK (still the world's sixth largest manufacturer) is well placed to benefit from the changing terms of trade triggered by the slide in sterling (much as it did following its exit from the ERM in 1992). As import demand falls and UK exports recover, the long-standing current account deficit should turn into surplus in 2011, and remain in the black until 2016 at least.

Source: Business Monitor International
Published by Mike Hitchen, Mike Hitchen Consulting
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