Saturday, 3 January 2015

Comparing the British and French economic recoveries

Yesterday, Paul Krugman presented a chart on his blog showing that, since 2007, French GDP per capita has recovered better than British GDP per capita, contrary to some media reports that France is the economy that has been underperforming. While I agree with Krugman that the French recovery has been somewhat better, and the British recovery somewhat worse, than these media reports suggest, I do think his chart is slightly misleading. 

First, the depth of the recession was in 2009 not 2007, and the UK experienced a much more severe recession (in terms of reduction in GDP) than France. Second, financial media reports are often forward looking: it is instructive to consider not only the recent path of GDP per capita, but also its predicted future path (at least for the next couple of years). As the first chart (below) indicates, when 2009 is taken as the base year, and the IMF's projections for 2015 and 2016 are included, GDP per capita is expected to recover better in the UK than in France. (Data are from the IMF; dashed lines are based on estimates of GDP).

Third, while GDP per capita may be the best measure of overall living standards, it is also instructive to examine metrics such as the unemployment rate. As the second chart (below) indicates, British unemployment has fallen since 2009, yet French unemployment has risen. And this is despite the fact that the latter was about a percentage point higher to begin with. In addition, British unemployment is expected to fall further over the next couple of years, while French unemployment is expected to remain high. 

Fourth, as the third chart (below) indicates, total GDP seems to have recovered better in the UK than in France; even by 2013, it had apparently risen slightly faster on this side of the channel. One possible explanation for why the UK's GDP has recovered more favourably in comparison to France's than her GDP per capita is that relatively more migrants with less-than-average productivity have settled in the UK. The arrival of such migrants has the effect of boosting total GDP while reducing GDP per capita. This is a highly speculative conjecture, and might be totally wrong. But it is supported by media reports that low-skilled migrants in Calais are eager to get into the UK. It is also consistent with the fact that the British population has grown faster than the French population over this time period, despite the fact that both fertility and longevity were marginally higher in France.

In conclusion, Krugman makes a valid point that some media reports have overstated the robustness of the British recovery and understated the robustness of the French recovery. Yet his chart plotting change in GDP per capita between 2007 and 2014 arguably gives a misleading impression of the relative performance of the two economies since the recovery began. A major caveat, of course, is that the IMF projections I have presented may prove to be largely or wholly inaccurate. 

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