Britain could become the world’s fourth largest economy within decades

Last week came news that, later this year, China is likely to overtake the US as the world’s largest economy. There should not be any surprise in this – except that it is happening so quickly.

In fact, China will only pass the US on a particular measure of GDP that employs an artificial exchange rate called purchasing power parity (PPP). If you simply valued the two countries’ GDPs at market exchange rates, the US would stay in front of China for many years to come.

That said, arcane though it is, in many ways the PPP measure gives a more meaningful picture. Although the Chinese authorities are coy about admitting it, in this respect, China really is on course soon to become the world’s largest economy.

Arithmetically, this is the result of China recently growing faster than the US. And that is largely because of China being so far behind in development that it has greater scope for fast growth.

But the fact that such a country can be top dog is a reflection of China’s population being more than four times the size of America’s. For a very long time after China has overtaken the US, American people will still, on average, be incomparably richer than their Chinese counterparts.

There is another important size issue closer to home which involves some of the same considerations. You might find the conclusions somewhat surprising. For most of my life the UK has been slipping down the rankings of countries rated by size of GDP.

This does not mean that British people have been becoming worse off. Quite the opposite. But the rate of improvement has been slower than in many other countries. And the result is that the country has become less significant in economic terms.

Mind you, you can readily over-do the declinism. Many people do not realise that on the market exchange rate measure, the UK is still the world’s seventh largest economy, larger than India and Russia. On the PPP measure it is eighth.

Until recently, the widespread view was that, although this ranking might be surprisingly high, it was bound to slip inexorably over the next couple of decades.

In fact, the opposite may be true. The UK is growing at about the fastest rate of any economy in the G7. Later this year the UK will probably overtake France and Brazil, and in PPP terms it could soon overtake Russia.

This would put it in fifth according to market exchange rates and sixth on a PPP basis. Now, there is an event in September which could radically change all this.

If Scotland votes for independence, the UK will immediately lose about 10pc of GDP and, accordingly, slip down the rankings quite a way. None of this would imply that people in the rest of the UK would be any worse off – at least not directly. Indeed, they may even be better off. But it would reduce the UK’s weight in the world.

That aside, in the decades ahead the UK’s ranking will be dominated, not just by matters of relative economic success, but also by demographics. Because of immigration and a relatively high birth rate, the UK population is set to expand materially.

Now before the serried ranks of “Disgusteds from Tunbridge Wells” inundate me with abuse, let me make it clear that I am not saying that this is necessarily good. But what I am saying is that, if it happens, it will have major consequences that we need to take cognisance of.

Other things equal, it would increase the size of the UK’s GDP. Again this does not necessarily imply a rise in per capita income relative to what would have happened anyway. Income could be increased, decreased or just left the same.

But it does imply a larger economy. Many reputable judges believe that within a few decades the UK will have overtaken Germany as the country with the largest population in Europe. If we manage our affairs well and the UK’s income per head at least stays level with Germany’s, then this would imply that we would have the largest economy in Europe.

Where we would rank in the world, of course, would depend upon how other countries fared.

It is inconceivable that America and China would not occupy the top two slots, whichever was in pole position. And Japan would be bound to be number three.

But thereafter there would be a good deal of uncertainty. The current fourth slot is occupied by Germany. If the UK overtook Germany then it is not inconceivable that we would be in the number four position.

For that to be true, though, the UK would have to continue to outgrow the countries that are currently snapping at its heels, and that may be difficult – although not impossible.

The key message is that the UK is not set to plummet down the rankings. I fully expect that during my children’s lifetime it will become the largest economy in Europe and remain in the world’s biggest 10 economies.

This should have a major impact on various aspects of public policy. Take our role in Europe, for instance. Could we contemplate an independent future outside the European Union? A small and declining nation would find this more difficult than a large and growing one that is Europe’s largest economy.

Should the UK continue to have a major role in global affairs, including retaining its permanent seat on the UN Security Council? And, linked to this, should the UK remain a major military power?

Our military planners and their political overseers seem to think that the next couple of decades are bound to be a continuation of the last couple, with persistent relative economic decline and therefore persistent decline in the affordability of, and the need for, strong defence forces.

Sometimes I think that the people who decide our defence strategy do not talk to the people who think about population trends. They need to. In 20 years' time, the chances are that the UK will still be a large economy and a major force in world affairs.

Roger Bootle is managing director of Capital Economics