LONDON, March 10 (UPI) -- The fall of the dollar has had some interesting statistical consequences, among them the demotion of the United States from being the world's largest economy to becoming No. 2, behind the European Union. Even more startling was the development that for the first time since 1890, the per capita gross domestic product of Britain was higher in dollar terms than the per capita GDP of the United States.
Thanks to Margaret Thatcher's reforms, North Sea oil and the vigor of the City of London's financial sector, the British economy has been doing extremely well over the past 25 years. Its manufacturing sector produces far more these days with a fraction of the workforce that it did when it was the workshop of the world. Its public finances have been well run, with government debt well below 40 percent of GDP, compared with the EU average of around 60 percent and Japan's 180 percent.
And with close to 10 percent of Britain's GDP coming from the "creative" industries like theater, film, publishing, media, design, fashion and all the arts (including electronic), it is probably the most modern -- in the sense of post-industrial -- economy in the world.
Despite the run on the Northern Rock bank and recurrent fears for the financial sector, British banks have published earnings reports for last year that were higher than or close to those they posted for 2006. Compare that with the United States, where one bank in four lost money in the fourth quarter and the overall results for 2007 were the worst since 2002. The write-offs for losses in the subprime and collateralized debt markets have been much lower than those in Europe or in the United States, and dividends have remained generous.
There may be much more bad news yet to come. The level of household and personal debt in Britain is even higher than it is in the United States, and the housing market bubble has been even more inflated. But so far it does not look as though the British economy is suffering to anything like the same degree as its American cousin. Consumer spending has been robust, house prices have even turned up yet again in London this year, industrial output and employment look reasonably sturdy and the economy seems on track to grow by 1.7 percent to 2 percent this year.
These are by no means boom times, and yet it is also very far from the recession that has now hit the United States. What has been going right for Britain? There are three obvious answers. The first is that even while North Sea oil output has declined, it still represents a very healthy cushion against the bizarre prices now being posted for a barrel of oil in the spot and futures markets. The second is that something like 60 percent of British trade is with the rest of the EU, which has been less hit by the slowdown than the United States, and the fall of the pound against the euro has helped British exports. The third is that Britain remains by far the most attractive location in Europe for foreign investment.
The latest World Investment Report produced by the U.N. Council on Trade and Development has reported that last year Britain attracted more than $1 trillion in inward investment, far more than any other European country. Britain attracted $1.135 trillion in foreign direct investment stocks, which was more than double Germany's $502 billion, and almost double the combined totals for China ($292 billion), Brazil ($221 billion) and Russia ($197 billion).
And yet the British newspapers are full of economic alarm and despondency and highly critical of Alastair darling, the chancellor of the Exchequer who replaced Gordon Brown when Brown became prime minister. Their main complaints are that the run on the Northern Rock bank, which has been taken into (temporary) public ownership, was badly mishandled; that public spending and government borrowing are unreasonably high and are becoming a burden on the real economy; and that tax changes have been a dreadful mess.
There is some sense in this last charge. Corporate tax rates are coming down, but capital gains taxes are going up from 10 percent to 18 percent. Moreover, London is about to lose its status as the favorite home of the seriously rich through changes in the status of people known as "non-doms." These are people who live in London but are not domiciled there for tax purposes, and are thus not taxed on their global incomes, but only on the income they actually have in Britain. The fear is that Darling's plan to hit them for a flat $60,000 a year will drive away the rich, with drastic impact on London's upper-crust housing prices, its restaurants and other services. Such has been the outcry against this populist measure that Darling may well amend it in his speech to Parliament Wednesday.
He will also announce two very sensible measures. The first is that the U.K. Treasury has designed a new "gold standard" for mortgage-backed securities that will be transparent, reliable and well-secured. This is intended to unfreeze the market and get funds flowing again, and if the global markets accept its reliability, this may become a highly popular instrument that brings new liquidity to the markets.
Darling will also make a stab at drafting a new growth narrative that investors can believe in. The global growth of the last five years was driven by the BRIC narrative, the belief that Brazil, Russia, India and China were growing so fast that the world was poised on the brink of a new golden age.
The weakness in that story was that nobody explained how the biosphere could take all that extra consumption and production. Darling will attempt a new story, that the next surge of global growth will be Green, and that he will direct Britain's economic strategy toward the new sustainable economy with incentives to slash carbon emissions by up to 30 percent using existing technology. This will be based on a report on "de-carbonizing road transport" prepared by professor Julia King that recommends a massive "showroom tax" of up to $4,000 on the most gas-guzzling cars, cheaper parking costs for efficient cars and so on.
In short, Britain's economic minister is trying to change the subject, and given the scale of the financial storm coming from the United States, the odds are not good that he will get away with it.
