Living standards. Sweat and cheers

Date: 02/08/03

Britain has caught up with continental Europe, but only by working more

AS THE beach beckons, Britain's economic outlook has clouded over. Growth has been lacklustre in the first half of the year and rising taxes have snipped at pay packets. Households have reacted by going even more heavily into debt, arousing worries that the consumer boom will end abruptly. To cap it all, the pound is much weaker than it was a year ago against the euro.

So does all that gloom make Britain once again the poor relation of Europe? In recent years, the strength of the pound has let Britons swagger as they holidayed on the continent, where three-quarters of foreign trips are made. Their number swelled by 40% between 1997 and 2002. At home, consumers could go bargain-hunting thanks to cheap imports.

The strong pound also gave a lift to Britain's international position in the global league tables as its GDP was revalued against other European economies. Britain and Italy had been neck and neck ever since Italy cheekily grabbed fifth place (mainly because of a new estimate for the black economy) in the mid-1980s. The ignominy of il sorpasso was finally expunged in 1997. Two years later Britain overtook France to capture fourth place - an accomplishment much trumpeted by Tony Blair. In 2002 the British economy was almost a tenth bigger than the French economy.

That ranking is now in jeopardy because of the fall in sterling against the euro. In the first seven months of the year the pound has on average been worth €1.46 - just enough to keep Britain ahead. But if it were to stay around €1.40 for the rest of the year, France would probably just squeak past, despite Britain's predicted higher growth rate.

But using market exchange rates to compare different countries' GDP can be misleading. A sounder method is to use purchasing-power parity (PPP), the exchange-rate that equalises the cost of a common basket of goods and services in two countries. Comparing GDP this way, says Paul Schreyer of the OECD, a Paris-based international think-tank, France and Britain have been virtually the same size since 1996.

Much the same is true of GDP per head, the most common measure of living standards. According to forecasts for 2003 by Eurostat, GDP per head (using PPP) will be 2% higher in Britain than in France. Britain has also inched ahead of Germany and Italy. Although some smaller economies like the Netherlands and Denmark have higher living standards, Britain is now above the average for the European Union.

This reflects an underlying improvement in Britain's economic performance over the past two decades, after relative decline during most of the post-war era. Since the start of the 1990s, Britain has been growing at an annual rate of 2.3%, compared with 1.9% in France, 1.5% in Italy and 1.3% in Germany. This is less because Britain has done well, more because the other economies have slowed down.

Strikingly, Britons have to work more to achieve the same living standards. The most recent figures - for 2002, when GDP per head was almost identical in Britain, Germany and France - showed a big gap in the amount of output produced per hour worked. In France, hourly productivity was a third higher than in Britain; in Germany it was a quarter higher. There are two main reasons for this shortfall. British workers are equipped with less capital. And overall efficiency is lower, mainly because of a less skilled workforce.

Less inspiration means more perspiration. A bigger chunk of the population is in work: 72% of those aged 15-64 compared with 63% in France. And British workers put in more hours a year than their European counterparts - on average 10% more than French workers.

Are other Europeans better off with their greater leisure? Not necessarily. Only if they can choose between work and fun. “In most European countries people don't have that choice because of restrictive labour markets and high taxes on employment,” says Bart van Ark, professor of economics at Groningen University.

Britain cannot rely on greater labour intensity indefinitely, especially once continental competitors start freeing their labour markets. For all the familiar signs of British economic frailty that are now making headlines, such as demand driven by consumption rather than investment, the biggest long-term worry is a different one: whether productivity growth, troublingly weak in the past few years, can revive.

In economic rankings the UK has caught up with continental Europe, but only by working more hours less productively.

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