2014 03 – UK should imitate Germany

UK should imitate Germany, not think of overtaking it

Supporting the British Mittelstand

Robert Bischof

The prediction by a leading London research firm that the British economy could overtake Germany’s within 20 years falls into the category of fantasy forecasting. Indeed, the UK must redouble its efforts to make sure the gap with Europe’s economic powerhouse does not widen further. To do that, it needs to ditch the short-term thinking that grips both the Government and the City of London.

The Centre for Economics and Business Research (CEBR) grabbed headlines with a report over Christmas that Britain will soon leapfrog France and stands a good chance of surpassing Germany to become Europe’s largest economy by 2030.

As a German living in the UK, I do not find the CEBR’s outlook credible.

Germany’s output in 2013 was worth $3.65tn, followed by France on $2.65tn and the UK with $2.45tn. To catch up with France within the next four years, Britain would need around $50bn in additional output a year. That would translate into a growth rate roughly 2 percentage points higher than France’s. Given the woes of the French economy, that is not out of the question.

But narrowing the gap with Germany looks tougher. German GDP is 45% per cent greater than Britain’s. Its workforce of 40m is 10m bigger and is over 10% more productive.

The consultancy argues that a weak euro will make it harder for Germany to stay ahead, as sheer currency conversion would give the UK an edge assuming sterling is strong. But this challenges the consensus that a weak currency helps Germany’s exports.

Even a chronically low birth rate is unlikely to have much of an impact. Germany in the past has relied on an influx of Gastarbeiter, or guest workers from abroad, to bolster the labour force. It is doing so now, with migrants arriving in increasing numbers from eastern and southern Europe.

Instead of asking whether Britain can catch up with Germany, it makes more sense to examine how to stop the gap from widening. The danger with selling illusions about the future is that it can breed complacency among businessmen and politicians alike.

Britain could easily do better and should do so. But it has to be realistic. The UK needs a huge effort to turn around its balance of payments deficit, to increase business investment and to make sure its youngsters have the right education and skills. Britain must improve its infrastructure, raise productivity and cease relying on rising house prices to fuel another consumption-led boom.

All these issues need to be addressed at a time when the government is still trying to get the deficit down. Germany, by contrast, will have a balanced budget this year.

Can the UK pull it off? I believe it can, but it needs a shift towards long-term strategies in business and government. Selling British businesses and assets to create short-term value for shareholders and calling it ‘inward investment’ is not the answer.

Mergers and acquisitions are no match for organic growth. Paying out more in dividends as a percentage of profits than any other developed economy is not a long-term strategy for success either.

The UK has an abundance of entrepreneurs but cannot emulate the Mittelstand – the small and medium-sized enterprises that are the backbone of the German economy. Instead of the silly-sounding acronym SME, why don’t we simply say we wish to support the British Mittelstand?

All too often starved of adequate bank finance, those British companies that make it over the first hurdle are soon driven into the arms of private equity or the stock market. Too many are swallowed up and disappear.

Lord Bamford, who chairs the construction machinery manufacturer JCB, his family firm, said to me not long ago: ‘If my dad or I had gone to the stock market for money, we would not be here any more.’

His words should haunt British politicians. If the UK wants to reduce its dependence on the City and succeed in international competition it should do something about developing more SMEs into JCBs. It’s the real economy, stupid!

 

Robert Bischof is Chairman of SCCO International and a member of the OMFIF Advisory Board.

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