Daniel Mahoney for City AM on the future of the British economy

CPS head of economic research Daniel Mahoney wrote for City A.M. on why the future of the UK economy is looking good, at least compared to the EU, Friday 24 June 2016. 

“Much ignored in the EU referendum debate was the fact that Europe’s population is ageing rapidly. From having four working-age people for every person aged over 65 today, within a generation the EU will have just two people to support those over 65.

However, there are vast differences across the EU, and the good news is that the UK is far better placed to deal with the challenges compared to most of the EU. The UK’s fertility rate is far higher than the EU average. For every 200 women in the UK, 181 children are born, compared to 151 in the EU as a whole. In Germany, the equivalent figure is 147 and in Italy it is just 137.

The UK is also attracting significant levels of net migration. Although the Office for National Statistics assumes that net migration will fall by half over the coming decades – a reasonable assumption inside or outside the EU – the UK’s working and overall population is expected to expand significantly, driven by natural change and immigration in equal measure. As a result, Britain’s population will overtake Germany’s at some point in the 2040s.

These trends will leave the UK with the most sustainable old-age dependency ratio of any major EU economy. Largely because of this, the OECD estimates that the UK economy will overtake Germany’s at some point in the early 2030s. We will, within a relatively short time, be the biggest economy in Europe.

If you wanted a precise time and date at which the British economy will overtake that of Germany, it would be at 6.27pm on 28 August 2032. While all such forecasts are, of course, fraught with uncertainty, the direction of travel is indisputable. The UK economy will, within the lifespan of anyone under the age of 50, be the biggest in Europe.

It will also be one of the most sustainable. While we might all complain about our public pensions system, it is still judged to be the most affordable of any major European economy. The UK government is estimated to spend just 7.7 per cent of GDP on public pensions, which compares to 10 per cent in Germany and nearly 15 per cent in France. And while the UK has been able to implement important reforms – by, for example, raising the retirement age to 67 by 2028 – other EU countries haven’t followed suit. Reforms in France have left the retirement age at 62 and the Italian pension system’s sustainability “is in doubt”, according to the leading Melbourne Mercer Global Pension index.

Another important long-term factor in looking at economic trends is the proportion of people who are in work. Here again, the UK fares very well, having the second highest labour and female participation rates of the major EU economies. Many other EU countries, however, face chronically low participation rates. In Italy, for example, it stands at just 64 per cent.

Will these EU countries be able to implement the reforms needed to encourage more people into work? Or will political and social realities make this hard to achieve? Evidence from the Eurozone suggests that problems lie ahead. Many southern countries have been forced to rely on “internal devaluation” – reducing labour costs to restore competitiveness. This has significantly increased unemployment and social hardship, particularly among the young. Youth unemployment stands at about 25 per cent in France, 37 per cent in Italy, 45 per cent in Spain and 51 per cent in Greece. And there is no sign of these problems subsiding in the near future.

The final element to sustaining ageing populations is to increase the productivity of workers. This is undoubtedly an area where UK policy-makers need to focus their efforts. The GDP per hour worked in France and Germany is around 30 per cent higher than in the UK, according to the ONS. Although this figure may overstate the problem – given that measuring productivity in a service-based economy like the UK is notoriously difficult – it is without question an area of concern. Despite this, however, the UK is undoubtedly better placed to weather the upcoming demographic storm.

By the time you read this article, the results of the EU referendum should be known. And while the debate itself never even considered the impact of the ageing megatrend on the UK and its relationship with the European Union, there are two different and quite legitimate interpretations of what the facts set out above will mean for the future.

The first is that the UK will be better off unshackling itself from a “dying bloc”. Are the EU’s demographic problems significantly greater than the political will to implement necessary structural reforms to mitigate them? Will the UK end up paying the price for shortcomings in Europe?

The alternative is that all this gives a new and unique opportunity for the UK to challenge the traditional German and French domination of the EU. As the largest and one of the most sustainable economies in Europe, can the UK – in the relatively near future – provide the necessary leadership and example to the other member states?

But whichever way Britain votes, the future looks bright for the UK, at least compared to the rest of the EU.”

Date Added: Saturday 25th June 2016