Brits seem on track to notch up two victories against historic rival France in 2015. Bookmakers have the English team finishing higher in the Six Nations rugby championship than France. The UK is also set to leapfrog France as the world’s fifth largest economy – the consequence of stronger growth and a rising pound.
Themis Themistocleous, Christopher Swann
The economic triumph, however, is more apparent than real. A crippled France is a major liability for the UK. And, as in the US, the UK’s growth has not done much to boost the living standards of the majority.
Of course, the divergence does, in part, reflect successful pro-growth economic policies in Britain. The deep recession in 2008, which shaved 6 per cent off GDP, was enough to lead the UK on the path of bold reform. Shifts in tax and welfare policy seem to have helped boost the labour supply. Levels of hiring have been strong, which has helped the unemployment rate plunge from 7.8 per cent at the start of 2013 to just 5.7 per cent in October to December 2014. The UK is on track to be one of the fastest-growing G7 economies in 2015, second only to the US.
By contrast, France – which suffered a peak-to-trough contraction of just 3 per cent between 2008 and 2009 – has refused to take on difficult reforms. It remains agonisingly hard to make workers redundant in France, with the result that potentially productive labour is trapped in unproductive occupations, and firms are reluctant to hire. Unemployment has remained stubbornly around 10 per cent, and French workers are even getting more expensive relative to their output. Unit labour costs are up 5 per cent since 2010, against a 3 per cent rise in the UK. Unless France embarks on substantial reforms, it could be heading for a prolonged period of next to no real growth.
Overall, it is not in the UK’s interests to have an economic liability as its closest large neighbour. France is the UK’s fourth largest trading partner, buying £21bn of UK goods and services in 2013, 6 per cent of total UK exports.
There are other knock-on effects from a weak France. Among the hardest hit by its malaise is Germany, which counts France as its top export destination, with £83bn in sales a year. And Germany is the number one European buyer of UK exports.
Moreover, the UK recovery is itself far from flawless, with sub-par benefits for the majority of the population. Many of the jobs the UK is creating are poorly paid. GDP is now 3 per cent above its 2007 peak. But wages after inflation have fallen by around 8 per cent over the same period – the fastest slide in living standards since the mid-nineteenth century.
Productivity growth has been non-existent, with output per hour unchanged since 2007. As of 2013, Brits produced 17 per cent less per hour than the average worker in other G7 nations. French workers lagged the G7 average by just 3 percentage points.
Fast growth also shouldn’t shift attention from worrying imbalances. Despite austerity, the UK ran a budget deficit of over 5 per cent of GDP in 2013-14. More growth-sapping fiscal tightening will be needed to bring this down.
Of course, the UK should enjoy its moment in the higher echelons of the economic growth league table. But any Schadenfreude over its neighbour’s woes would be misplaced.
Themis Themistocleous is head of the European Investment Office at UBS Wealth Management, and Christopher Swann is director in the Chief Investment Office at UBS Wealth Management.