The UK economy has demonstrated resilience and adaptability over the last century in the face of war, political shifts and colossal changes in the pattern of international trade. The decision to withdraw from the European Union comes at a time when seismic shifts are occurring in the global economy which already pose severe challenges to the UK. The Brexit negotiations and recent general election have brought some of these issues to the forefront of political and public debate. These include an ageing population, the challenges of a slower growing economy and the adverse effects of the digital age. This article examines some of the long term global trends and potential implications for the UK.
The last century in a nutshell
Between 1900 and 2000 the global economy grew by a compound annual rate of 3.6%, the highest for two millennia.
Source: J. Bradford DeLong
There are many causes of the rapid acceleration in economic growth but one of the most important is population growth. Between 1900 and 2000 the world population increased from 1.5bn to 6.5bn, three times greater than in its entire history.
Judging the UK’s economic performance during this period is a subjective exercise. One of the most common methods of measuring economic success is output per person, known as GDP per capita. Taking a simple ratio of UK GDP per capita to world GDP per capita shows that in the early 1900s UK GDP per capita was three times larger than the world GDP per capita and by 2000 it had actually increased slightly to 3.2, a result some may find surprising.
In 1900 the UK was the world’s largest exporting nation, accounting for 14.6% of world exports and 29% of world trade in manufactured products. Over the ensuing 100 years, the UK share of world exports fell to 5% as the empire was lost, the country was made bankrupt by two world wars and the manufacturing sector contracted.
The UK has, however, proved to be flexible in adapting to the changing international trading environment. In the early 1900s exports to the Commonwealth countries accounted for one-quarter of total UK exports but by 2000, 55% of UK exports were to the EU, reflecting the creation of the single European market and the rise of the EU economy to one of the largest economic blocs in the world.
Global secular outlook
There are likely to be three key drivers shaping the global economy over the long term; demographics, slowing global economic growth and the digital age.
After its record breaking rate of growth, the world population has now slowed to half that of the previous century to 1.1%. Projections by the United Nations expect the rate of growth to fall to 0.1% later this century.
Not only is the pace of population growth slowing but we are also faced with an ageing population. In 2010, 7.7% of the world’s population was aged 65 and older. The United Nations projects that by 2050 the proportion will be 15.6%, an unprecedented rate of ageing. There are very wide differences between countries. Japan tops the ageing list with an estimated 36.5% of its population aged 65 or older by 2050, compared to Nigeria with just 3.8%. Britain is projected to have 24.7% of over 65-year-olds by 2050 compared to Germany with 32.7%.
We can expect these demographic trends to cause global economic growth to slow down this century, a trend that is already noticeable. So having gone from one of the fastest growing centuries we will be reverting back to a much slower pace. The source of economic growth will also be geographically different.
PWC, in their thought provoking report ‘’ The Long View’’, predict the size of the top thirty economies in 2050. Using economic projections from the International Monetary Fund and United Nations’ population forecasts, PWC forecast that the share of Asian economies of world GDP will rise from the current 44% to 54%, whilst the G7 share of world GDP will fall from 37% to 24%. This will result in a significant shift eastward in the economic world order. The current and projected future top ten largest economies are set out in the following table.
The UK is projected to decline from ninth to tenth over the next forty years. But in one sense it is remarkable that the UK is even in the top ten given that the UK’s population of 65 million currently ranks 21st in the world compared to Japan’s 127 million people.
Technological advancement has always been a key driver of economic success and the arrival of the digital economy in the late 20th century is another phase of innovation. The development of machine learning and artificial intelligence is a 21st century phenomenon and is driving economic activity by the ability to disrupt well-established commercial enterprises, creating new businesses and shaping working practices.
The application of this technology is resulting in change which is sometimes difficult to adjust to. There is widespread concern about job losses, diminished opportunities for well-paid professional careers as the new technology is potentially making widespread changes in the service sector, whereas previously, technology had the largest effect in the manufacturing sector. Although there is much press given to the fear that robots will take over jobs, I believe it is too early to assess how employment will be affected by the digital age.
One study in America by James Bessen, a Harvard economist, points out that in the last 60 years in America, automation has only resulted in the loss of one occupation, the elevator operator. Maybe this time the effect of digital automation will be different but so far automation has not resulted in mass unemployment.
Rather than being seen as a threat, the arrival of the digital age comes at a very convenient time. The combination of slowing population growth and an ageing workforce causes productivity growth of humans to slow down. Slower productivity reduces the ability of the economy to support the increasing proportion of the population not in work. If productivity can be raised by the harnessing of new technology this would be an offset to the demographic trends. Achieving this will be a major economic challenge for the 21st century, but a successful economy will have to ensure it has a strong presence in the sector.
Although the UK economy has fared well over the last century by maintaining its ranking in the economic league tables, and navigating the changing patterns of international trade, one cannot escape the feeling that the task ahead will be more difficult because of increased competition due to globalisation and because the UK’s infrastructure is outdated and broadband coverage and speed is inadequate in some regions. However, the UK has strengths as identified by the Business, Energy and Industrial Strategy Committee’s report of October 2016. The following table summarises these, together with a list of weaknesses:
In a global economy which is shifting eastward and increasingly technologically dependent, the most helpful strengths for the UK will be the established legal and financial services sectors, property (including intellectual property) rights and its academic/research capabilities.
There is little to be concerned about the first two strengths, as they are deeply ensconced in British society. Even the threat to UK financial services from the possible loss of passport rights to the EU, whilst problematic, need not be a terminal threat – providing the UK remains as innovative as in the past, particularly with the application of new technology such as blockchain, for example, which enables peer-to-peer financial transactions without the need for a central clearing system. It was developed to facilitate trading in bitcoin but it has the potential to displace traditional clearing houses.
According to the Z/Yen Group annual survey, London tops the Global Financial Centres Index ahead of New York City. The next EU city is Luxembourg with a global ranking of 18th. The UK’s substantial lead is not just because of its membership of the EU, although clearly this is a helpful factor, but mainly due to the depth and sophistication of its financial services.
The following chart from the UK Treasury shows the relative strength of UK industry by sector against the G7 countries (Canada, France, Germany, Italy, Japan, UK and USA):
This chart confirms the UK advantage in insurance and financial services. Another key strength is the development of intellectual property (IP). Scientific invention and innovation is vital and should potentially play a significant role in contributing to the UK’s future success.
However, whilst the UK’s record in developing IP is good, helped by a ready supply of long term capital prepared to invest in risky start-ups, a long-standing challenge has been the UK’s inability to grow small successful companies into world leaders. Too often promising UK companies are bought by non-UK companies because of the lack of availability of growth equity. This deprives the UK of maintaining companies at home with all the employment, investment and brand awareness for the UK that this brings. The growing appetite of UK pension funds for private equity is, therefore, an encouraging trend for the future.
A potential Achilles’ heel is a lack of investment in education and research and development. Not only does the UK need to raise basic education and skills training but the scope of education has to be broadened to incorporate lifetime training. The fast changing world will require a stagnating workforce to be re-trained and this should be done as a partnership between private and public sector. Singapore is a good example where this is being done, as those with redundant professional skills and being re-trained within a new workplace with the assistance of public sector funding. Ironically, an early version of this programme first took place in Singapore in 1969 when the Singapore Technical Institute was established specifically for re-training purposes using the British model and it was assisted by British advisers!
One of the key factors to look for when judging the UK’s progress in the 21st century will be the role of government. Obviously, the private sector must make its own way but assistance from the government to help de-risk early stage use of new technology is helpful. For example, the German Government has invested €500m into the so-called ‘fourth industrial revolution’, encouraging German industry to incorporate artificial intelligence into manufacturing processes. China, Japan, South Korea and the US are also investing in this sector. This is not currently on the UK Government’s agenda which means the private sector will need to fund it unless a future government takes a more active role.
The UK has a big challenge ahead of it just to maintain the current living standards of its population, let alone repeat the last century’s feat of improving them relative to the rest of the world. Encouraging signs that the UK economy is responding to the changing global forces are that UK exports to non-EU countries have risen from 45% in 2000 to 55% in 2015, exports to the EU rose by a 3% annual rate over the same period, and technologically based industries and services are growing. The UK’s digital economy is growing at twice the rate of the wider economy and now contributes around £97 billion a year, an increase of 30% over five years, according to a recent government report.
In the short term, Brexit will absorb much time and effort. However, the broader secular changes occurring in the world will be at least as important, if not more so, in determining the UK’s economic future. In my opinion, these should be the focus of attention of both the public and private sectors.