In the first part of this series, I showed that the UK has been quite successful for what concerns the most important measures of economic development. Crucially, private consumption developed much better than in France, let alone Germany. But how did investment, productivity and foreign trade evolve?

Since 1980, the development of gross fixed capital formation (i.e. equipment and buildings) in the UK remained entirely within the margins of Germany and France’s accomplishments (see figure 1). We notice that Germany experienced a huge unification boom (driven by – how could it be otherwise? – credit-financed government spending!), although it later on stagnated, until the outbreak of the financial crisis. The UK, on the other hand, recorded an investment boom during the 2000s, which then fell dramatically after the financial crisis.

Figure 1

However, as figure 2 shows, with 1999 as a basis year, since 2009, investment in the UK vigorously increased again. Compared to Germany and France, one can speak of a successful recovery of investment in the UK.

Figure 2

If we split investment into construction investment and equipment investment (see figures 3 and 4), it is clear that it is primarily the enormous building boom which makes Britain’s investment figures look impressive. From 1995 to 2007, the building boom in Britain had no equal anywhere in Europe. But even after the crisis of 2008/2009, investment recovered very quickly.

Figure 3

Equipment investment on the other hand, i.e. machinery and installations in industry, remained at the same level between 1999 and 2013. Recently there has also been a modest recovery here.

Figure 4

The latter becomes particularly clear when we choose 1999 as a basis (see figure 5). The United Kingdom lags significantly behind Germany and France, but it experienced a strong upturn since 2013. UK growth is stronger than Germany’s recovery (which has in this year already come to an end) and it is now also stronger than France.

Figure 5

The British investment rate remains nonetheless low (see figure 6). It witnessed a brief upswing in the 1990s, but has been dropping continuously almost every since and a recent recovery has been extremely modest. However, without a unification boom in Germany, Germany’s evolution would doubtlessly have been very similar to the one in Britain. France turns out to be the healthiest economy of the three since the financial crisis of 2008/2009.

Figure 6

As figure 7 illustrates, there is no linear, one-to-one, transfer from investment in equipment to productivity. Despite weak investment activity, Britain holds up with France. As Germany’s productivity fell because of the unification, the respective evolutions are not comparable.

Figure 7

Figure 8 also depicts productivity, but this time the basis year is 1999. It is not possible to identify weak productivity growth because of weak investment in the United Kingdom.

Figure 8

Productivity per hour in Britain, unlike in Germany and France, has increased little since 2007. But the increase between 1999 and 2007 is remarkable by all standards.

Despite its relatively positive productivity increases since 1999, in terms of unit labour cost growth, the UK plays in a league of its own. In national currency, during the 2000s, wages in relation to domestic productivity rose in the UK much more than in France, not to mention Germany.

Figure 9

The UK has of course its own currency and therefore the comparison in needs qualification. The evolution of the real effective exchange rate (this is the measure of competitiveness against major trading partners) shows that, for a long period of time, there was no significant effect (see figure 10). From 1999 to 2007, the Pound did not rise or fall sufficiently to compensate for its high unit labor cost increases compared to its European trading partners.

The UK depreciated strongly during the so-called Sterling crisis of 1992 – 1995, but it appreciated strongly after 1995. It recorded a permanent increase in the real exchange rate and, therefore, a loss of competitiveness since the start of the European monetary union until the financial crisis of 2008/2009 (see figure 10).

Figure 10

The Pound only plunged after the crisis after which competitiveness significantly increased. The recent depreciation of the Pound after the Brexit referendum should provide a further boost.

In terms of export and import dynamics (see figures 11 and 12), the UK could not keep up with Germany, which is permanently undervalued, but its development was very similar to that of France and should be considered a normal evolution.

Figure 11

Figure 12

Although imports over the last fifteen years have increased much less than in the two member countries of the European Monetary Union, an ever increasing current account deficit turned the UK over the years into a chronic deficit country (see figure 13). The depreciation after the financial crisis has apparently been insufficient to prevent this.

Figure 13

Since 2011, the current account deficit has been rapidly evolving towards 6 percent (of GDP) and for this year 7 percent has been forecast. Germany, in particular, benefited from this. Britain has become the second largest counterpart to the German surpluses. Is this year, as was also the case last year, a deficit of 50 billion euro with Germany is to be expected, at least assuming that the de facto depreciation of the Pound because of the Brexit will have no huge impacts on trade. The British deficit with Germany is almost as big as the American one. Germany is, by very far, the trading partner with the highest bilateral surplus. It has gained the most from the policy of recent years, which was based on a decrease of domestic consumption.

You can read in the third part how the British consumer boom can be explained and what the British economic policy should now try to accomplish, with or without UK membership of the European Union.