Blog: Despite Covid, Brexit and inflation, the UK’s long range economic forecast is bright – iNews

It is sometimes easier to look a few years ahead than it is to look a few months, and this is surely one of those times.

We can only guess as to whether the pandemic will be pretty much over by the summer, but we can be confident that in five or 10 years’ time it will have become a distant memory.

After all, by the late 1920s the scars of the so-called Spanish Flu pandemic of 1918/19 had long faded, to be replaced by other and even more worrying issues.

But what do economists – a breed not noted for accurate predictions – sensibly say about the world economy a decade hence?

Well actually quite a lot. Long-range forecasting was popularised by Goldman Sachs, with its BRICs report, back in 2001 and 2003. The clever idea of the head of its economic team, Jim O’Neill, now Lord O’Neill, was to use an economic growth model to show that the four largest emerging economies, Brazil, Russia, India and China, would grow much faster than the economies of the developed world. And the acronym stuck.

The detail, as you might expect, was wrong. Both China and India have done rather better than forecast, with China now likely to pass the US to become the world’s largest economy by 2030, rather than 2040. Russia and Brazil have, for different reasons, done rather worse.

But the broad thrust of the work was spot on. Growth, and the economic clout that goes with it, was shifting from the developed economies to the emerging ones.

The work of Goldman Sachs has been modified and updated by others, most recently by the London-based Centre for Economics and Business Research in its World Economic League Table, released just after Christmas.

Its key messages are that China will indeed pass the US in size in 2030, that India would pass France next year and become number three behind China and the US in 2031, and that Germany would overtake Japan in 2033.

And the UK? Well, the report is positive about the country’s growth prospects, suggesting that it would pull well clear of France to have an economy some 16 per cent larger by 2036.

Quite a lot of these big predictions are intuitively obvious. China and India with their huge populations were the world’s largest economies until the Industrial Revolution took off in the 19th Century and propelled the UK, Europe and then the United States, to what we now call developed country status.

Now the emerging nations are applying the technology developed (mostly) in the West and catching up. China is now a middle-income country, not a poor one.

The positive outlook for the UK may, however, come as a bit of surprise given the gloom so often reported about the country’s economic prospects, not just because of Brexit and the pandemic but most recently about the surge in inflation.

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Actually, the UK’s overall prospects are much the same as that calculated by Goldman Sachs nearly 20 years ago. In that original report, the UK was predicted to become not only a larger economy than France but also larger than Germany by 2040.

The principal reason for this is demography. The relative youth of the population and the size of the workforce are important determinants of economic growth. The UK has a somewhat younger population than most of Europe; we are, so-to-speak, getting older more slowly than the rest of the pack.

And we seem to be particularly attractive to immigrants, even now after Brexit. Indeed the fact that Germany is performing rather better than Goldman Sachs suggested in that original report is largely that it has attracted many more immigrants than it expected back then.

This is encouraging for the UK, but the relatively modest changes in the pecking order of European nations are ultimately much less important than the broad economic shifts of power that are taking place. We don’t notice these because in any one year the shift is modest. But over a decade or more it is huge. I would pick out five big themes that will shape this decade.

The first is the most obvious: the rise of China. It doesn’t really matter whether it passes the US in 2030 or 2035. This will happen and we have to accept that, with all plusses and minuses this involves.

Second, equally obvious, is that India becomes more important, and that will create new challenges notably for its relationship with China.

Third, and this may come as a surprise, the US will not only remain the dominant economy of the developed world. It will become more dominant, continuing to outpace Europe and Japan, as it has for the past 25 years.

The reason is not only its technical competence, but also its relatively youthful population and its attractiveness to well-educated immigrants.

Four, the weakness of Russia, again perhaps a surprise. It is not a very big economy given its population and huge land area: smaller than Italy and not much bigger than Spain. And in relative terms it will probably shrink.

Finally, perhaps the most encouraging of all, while climate change will lower consumer spending as companies pass on the costs of decarbonising, living standards in the developed world can still rise.

This transformation will be a huge challenge, but we can certainly feel a little more upbeat about life post-Covid.

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