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British flags in London. Picture: Pixabay
British flags in London. Picture: Pixabay

Theresa May’s tough talk on Brexit has put so much pressure on sterling that the UK has fallen below France in the table of economic powers measured at market exchange rates, writes Chris Giles.

At the start of the week, the prime minister, chancellor, foreign secretary and Brexit secretary all boasted that the UK would get a good deal in EU divorce talks because Britain was the fifth-largest economy in the world.

Their words could be justified with sterling at €1.16 at the end of last week. But the ­paradox of the tough talk has been to pull the rug from under sterling, leaving it at a post-Brexit vote low of €1.14 yesterday and below the point at which it is the fifth-largest economy. International Monetary Fund estimates of the size of economies in 2016 put the UK at £1,932bn with France weighing in at €2,228bn, putting the UK ahead so long as a pound buys more than €1.153.

Economists do not regard the use of market exchange rates as the best way to measure an economy’s size as conversion rates do not account for the goods and services that can be bought in any country, but Britain does even worse on more sophisticated measures.

IMF figures show that at purchasing-power parity, the UK is only the ninth-largest, behind China, the US, India, Japan, Germany, Russia, Brazil and Indonesia. On this measure it does sneak ahead of France, which sits in 10th place.

Britain’s relegation will come as an embarrassment to the prime minister at the Conservative party conference in Birmingham because it comes only two days after Mrs May said: “A truly global Britain is possible, and it is in sight. And it should be no surprise that it is. Because we are the fifth-biggest economy in the world.”

Her words sparked a flurry of copycat statements by ministers who supported both the remain and leave votes in the EU referendum.

David Davis, Brexit secretary, said Britain’s position of strength in the world stemmed from being the fifth-largest economy; Philip Hammond, chancellor, said that being the fifth-largest allowed Britain to negotiate with the likes of France and Germany from a position of strength.

Boris Johnson, foreign secretary, said Britain was the “fifth-richest” economy in the world, but on a comparable measure of gross domestic product per person, the IMF ranks Britain as only the 27th richest with Qatar and Luxembourg taking the two top spots.

The IMF also cut the UK’s 2017 growth forecast to 1.1 per cent, although it remains more optimistic about Britain’s prospects next year than most independent forecasters.

Copyright The Financial Times Limited 2016

 (c) 2016 The Financial Times Limited

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