Britain slips to 6th largest economy

A fall in the external value of the pound against the Euro is mainly responsible for the UK slipping to 6th place in the global league table for size of economy as measured by GDP. This is reported in today’s Financial Times. ”

In 2006, the GDP of France was €1,792bn (£1,353bn) compared with £1,304bn for the UK. With sterling worth €1.47 on average in 2006, this put the UK economy comfortably 6.7 per cent ahead of the French economy. But with sterling’s more than 10 per cent fall against the euro in the past six months to €1.32 to the pound, the UK’s economy in 2008 is now 4 per cent smaller than France.”

Movement up and down international league tables is an inevitable process given the vagaries of the foreign exchange markets. A depreciating currency does provide some advantages though - it makes us more competitive when trying to export to the rest of the European Union and a weaker currency could help the process of rebalancing the economy away from domestic consumption towards exports and investment. That said, the depreciation does make it more expensive to import threatens a further rise in the consumer price index.

Perhaps France overtaking us in 2007 is more symbolic than of any real macroeconomic significance? What matters for living standards is per capita income rather than the overall size of the economy.

Martin Wolf is worth reading on this

“Why sterling is the next dollar”

http://www.ft.com/cms/s/0/996a30e8-bfb3-11dc-8052-0000779fd2ac.html