There is a growing fashion amongst economic pundits for claiming that the UK is starting to behave like an emerging market. In more level-headed times, it would go without saying that this is arrant nonsense. And yet with level-headedness being less prized than it used to be, the idea has gained traction. So how far wrong is it? Let me count the ways.
We may not have a precise definition for an emerging market, but there are some easily identifiable shared characteristics. Lower-than-average income per capita, faster-than-average economic growth, currency volatility and issuance of government debt in foreign currencies are all good empirical metrics. On the “softer” side, you might also include political instability, dependence on exporting to China and the degree to which the country’s central bank imitates the actions of the Federal Reserve.
How well do these characteristics describe the UK? By any objective assessment, very poorly indeed. Start with the hard numbers. The World Bank defines developing countries as those with income per capita of less than $4,035. The UK’s figure is more than ten times that. Meanwhile, economic growth may have confounded expectations following the 2016 referendum, but – to put it mildly – the stats are way short of the high single digits achieved in 2018 by the likes of Egypt, Poland, Bolivia, China, India, Vietnam and Malaysia. And, while the UK government does hold a small amount of foreign currency debt, it is a fraction of that held by (for instance) Argentina. Three quarters of UK government debt is owed to domestic investors.
What about the softer factors? The impact of Chinese growth, or any lack thereof, is difficult to quantify. But the fact that UK exports to China account for only 3.6% of the total suggests a fair level of independence. As for the question of whether the Bank of England is obliged to mimic the Federal Reserve’s monetary policy decisions, the experience of the last four years has settled it in the negative.
On to political instability, then. With hysteria being the order of the day at most news outlets, this one seems more applicable. According to certain headlines, the UK government has just suffered a coup by a cabal of far-right, anti-establishment ideologues who are seeking to abolish the British state in favour of something like the feudal system. Admittedly, it is a funny sort of coup that installs a leader elected by his party members, who then immediately begins preparations for a general election in order to obtain a wider democratic mandate. And it is a funny sort of far-right Cabinet that immediately pledges an additional £1.8 billion of spending on the NHS.
In fact, the only area in which the comparison to any emerging market looks remotely valid is the volatility of the pound’s exchange rate. It is beyond argument that sterling has had a torrid few years by the standards of a G10 currency, and in recent weeks it has taken a particular hammering. Again, though, some context is needed. From its pre-referendum peak to the lows seen in January 2017, the pound depreciated against the US dollar by around 19%. From June 2016 to the present day, the similar trough-to-peak change for the euro was a little over 20%. Over the same period, true emerging market currencies (think of the Turkish Lira or the Argentine Peso) posted peak-to-trough changes of up to 70%.
None of this is intended to suggest that smooth sailing is ahead for the UK economy. With less than three months to go before we reset our relationship with our largest trading partner, the timbre of that reset is still unclear. There is bound to be turbulence ahead. But the comparison with emerging markets is misjudged, damaging, and discourteous to citizens of economies that are facing more severe challenges than ours.
Upcoming Economic Releases
After last week’s monetary policy announcements in the US and UK, the coming week is set to be a less eventful one for economic data. Releases include:
- Thursday: Publication of ECB economic bulletin
- Friday: UK GDP growth for Q2 2019 (expected at 1.4% YoY, down from 1.8% last quarter)
- Friday: UK Manufacturing Production growth for June 2019 (expected at -1.1%, down from 0% last month)
For more information, please contact Joshua Roberts, Associate Director at Chatham, at firstname.lastname@example.org.