How large is the EU Economy?
Since its formation in 1993, the European Union1 (EU) has become larger than any individual economy in the world, with its GDP surpassing the USA’s in 2003, for the first time since 1998, as shown in Figure 1. Despite this, the EU’s share of global GDP has fallen from 30% in 1993 to 24% in 2013. This is because growth in non-EU economies has outpaced growth of EU economies, mainly driven by strong growth in the BRIC (Brazil, Russia, India and China) economies.
Figure 1: Level of annual Gross Domestic Product, US$, current price
- Source: World Bank
How important is the EU to UK trade?
The UK has traditionally had strong trade links with the EU. Despite changes in the composition of the global economy, the EU in 2014 accounted for 44.6% of UK exports of goods and services, and 53.2% of UK imports of goods and services. However, strong economic growth in many developing economies outside the EU has resulted in non-EU economies growing in importance to UK trade, with the proportion accounted for by the EU falling consistently since 1999, despite the value of EU trade increasing.
Exports from the UK to EU and non-EU countries have grown on average by 3.6% and 6.5% respectively in each year between 1999 and 2014. However, the stronger export growth to non-EU countries has resulted in the proportion of UK exports destined for the EU falling from 54.8% in 1999 to 44.6% in 2014. Growth in the value of UK imports of goods and services from EU and non-EU countries is more comparable, growing on average by 4.7% and 5.5% respectively in each year since 1999.
Faster growth in the value of UK imports compared to exports with the EU has resulted in the UK’s overall trade balance with the EU deteriorating (value of imports exceeding exports), with the trade deficit widening notably, reaching £61.6 billion in 2014 compared with £11.2 billion in 1999, as shown by the black dotted line in Figure 2.
UK trade with the EU is dominated by goods rather than services; in 2014, trade in goods represented close to two-thirds of all UK exports to the EU, and over three-quarters of total UK imports from the EU. Between 1999 and 2014, goods imported by the UK from the EU have risen by 4.9% per year on average, compared to exports which have risen by 2.5% per year, causing the UK’s trade in goods deficit with the EU to rise to £77.0 billion.
Although the UK has historically recorded a trade in goods deficit with the EU, its trade in services balance with the EU is much more favourable, running a surplus in each year since 2005, which reached £15.4 billion in 2014.
UK exports of goods and services to non-EU countries have grown at a faster rate than imports, driven largely by services exports. This has resulted in the UK running an overall trade surplus with non-EU countries (value of exports exceeds imports) over the past three years, which reached £27.8 billion in 2014, as shown by the grey dotted line in Figure 2.
Figure 2: UK exports and imports to EU and Non-EU
How important is the EU to UK foreign direct investment?
Between 2004 and 2013, the net stock of assets held by UK residents and businesses overseas grew by an average of 5.4% per annum, but this was outpaced by growth in the net stock of assets held by overseas residents and businesses in the UK, which rose by an average of 11.6% per annum. This resulted in the UK’s net position with the world – that is, UK net assets held overseas minus net overseas assets held in the UK – declining by an average of 15.9% per annum over the same period.
Within these totals, the EU remained both a major investor in the UK and a major recipient of UK investment; in 2013, 43.2% of UK overseas assets were held in the EU, whereas 46.4% of assets held in the UK by overseas residents and businesses were attributable to the EU.
The 2013 figures reflect a decline in the proportion of total stock of assets held by UK residents and businesses in the EU, which has fallen from 51.6% in 2010. These movements may reflect the challenging economic environment in the EU. As seen in Figure 3, the earnings the UK receives from its net stock of assets held in the EU has struggled to recover since the 2008-9 economic downturn. In contrast, the return on investment from non-EU countries did recover, although began to decline again in 2012.
Figure 3: UK net stock of assets held overseas and earnings received
In terms of overseas investment into the UK, the proportion of net assets held in the UK by EU residents and businesses has fallen from 53.2% in 2009 to 46.4% in 2013. As seen in Figure 4, this decline does not reflect a contraction in the value of net assets held by the EU in the UK – which has risen by 24.8% since 2009 – but rather a proportional change due to a larger increase in the value of UK based assets owned by non-EU residents and businesses, which rose by 64.1% over the same period.
The relative strong growth in the stock of net assets held in the UK by non-EU countries has resulted in their value exceeding the EU’s stock in 2010. This recent development may reflect how, between 2008 and 2011, earnings received by non-EU countries from their UK based assets recovered more favourably compared to EU assets relative to their respective pre-downturn peaks. More recently, EU earnings have risen since 2012 and surpassed their pre-downturn peak in 2013.
Figure 4: Overseas net stock of assets held in the UK and earnings received
As outlined in the figures discussed, growth in the value of net assets held by EU and non-EU residents and businesses in the UK outpaced growth in the value of UK net assets held overseas, therefore deteriorating the UK’s overall net position with the world. Between 2010 and 2013, the UK’s net position with the EU fell from a surplus of £185.9 billion in 2010 to a deficit of £5.1 billion in 2013, and from a surplus of £134.6 billion to a surplus £64.7 billion with non-EU countries. This deterioration reflects both a reduction in the number of assets held by UK residents and businesses in the EU, and an increase in the value of assets held by EU and non-EU residents and businesses in the UK.
1. Mentions of the EU in this short story are referring to the 28 member states aggregation.
2. Stock of assets refers to FDI positions, defined as a lasting cross-border investment in which the investor holds a significant degree of influence over an enterprise (equity holdings worth 10 percent or more are considered significant).