Does Britain Have Europe's Strongest Economy?

Prior to the global financial crisis that erupted in 2008, it was widely assumed that the United Kingdom had the fastest-growing, most dynamic economy in Europe.  However, the financial crisis rocked the British economy, causing major disruptions to its Europe-leading financial and service sectors and sending the British economy into a deep recession from which it struggled to emerge for a number of years.  Over the past two years, the economic situation in Britain has improved considerably and now, Britain has, once again, the fastest-growing large economy in Europe.  Does this mean that Britain has the strongest economy in Europe and can the UK main its growth advantage over the rest of Europe?

After a slowdown in the first quarter of this year, the British economy bounced back strongly in the second quarter, growing by 2.6% on a year-on-year basis during that period (0.7% quarter-on-quarter).  This meant that Britain’s per capital GDP level has finally exceeded the level that it was at when the global financial crisis hit in 2008.  Moreover, it confirmed that the UK remained likely to match or even exceed the 2.6% GDP growth rate that it recorded in 2014, which was easily the highest growth rate of any large developed European economy last year. 

Britain’s growth in the second quarter of this year was once again driven by its dominant services sector, a sign that investors remain confident that the UK’s financial and other service sectors can continue to grow amid the current economic concerns in Europe and further abroad.  Moreover, second quarter economic growth was boosted by a major surge in North Sea oil and gas production, but this is clearly not as sustainable as the growth in Britain’s services sector.

So is Britain once again Europe’s strongest economy?  Over the past two-and-a-half years, the British economy has grown by a respectable average of 2.2% per quarter, a much better performance than Germany (0.9%), Spain (0.6%), France (0.5%) or Italy (-0.9%).  This highlights the fact that Britain’s more flexible economy has been better at attracting foreign investment into higher-growth industries that its European rivals, allowing it to return to growth despite the region’s economies struggles.  However, when one looks at the economic performances of Europe’s largest economies throughout the region’s economic crisis (from 2008 until today), Britain’s economy looks not as strong, having recorded average economic growth rates of just 0.8% since 2008.  This is below the 0.9% average GDP growth in Germany and just a little above the 0.4% average GDP growth in France. 

Nevertheless, when one looks at the relative economic performances of Europe’s largest economies over the past 20 years, it is clear that Britain has outperformed most other large European economies, having grown by an average of 2.1% since 1996, the same rate as Spain and above France (1.6%), Germany (1.3%) and Italy (0.5%).  As is the case in 2015, this longer-term growth has been driven by investment in Britain’s dynamic services sector that continues to dominate its European rivals.

Both over the near-term and longer-term, it is clear that Britain has been Europe’s strongest economy.  This is due in part to the fact that Britain’s service sector dominates the region and that Britain had long ago undergone the decline in less-sophisticated manufacturing that is underway in many other European economies.  Moreover, while much of Europe is in the midst of a demographic decline, Britain’s higher birth rate and its ability to attract highly-skilled immigrants gives it a distinct advantage over the rest of the region. 

Over the next five years, we forecast that the British economy will grow by 2.3% per year, easily exceeding the forecast average growth rates in Spain (1.8%), Germany (1.6%), France (1.3%) and Italy (0.7%).  As a result, the British economy will remain the most dynamic large economy in Europe, as long as Britain can continue to attract foreign investment (a Brexit could jeopardize this) into high-growth sectors of the economy.  Moreover, Britain’s domestic market outlook is significantly more positive than that of most other European economies, preventing the British economy from becoming completely reliant upon exports to generate growth.