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British economy falls behind India as recession looms

India has overtaken the UK as the world’s fifth largest economy as Britain teeters on the brink of recession.

The world’s second-most populous nation overtook the UK in the last quarter of 2021 and has since continued to increase its lead, according to an analysis of International Monetary Fund (IMF) data by Bloomberg.


It marks a watershed moment for the former British colony, propelling it into the top five global economies in nominal dollar terms.


While British growth was sluggish in the first quarter of this year and output is expected to shrink in the coming months, India is the world's fastest growing economy and domestic demand is booming.


Deloitte forecasts from July suggest that India’s growth will average an annual 6-7pc over the next few years and suggest it could become a driver of world growth, as major Western nations head into a downturn.


Its stocks have also rebounded strongly, with the S&P BSE Sensex jumping 11pc this quarter, making it the world’s best performance among national benchmarks in countries with a stock market value of at least $1 trillion, according to Bloomberg. The increase puts it in second place in the MSCI Emerging Markets Index, just behind China.


While India was ranked as the 11th largest economy only 10 years ago, its rapid expansion will likely cement the lead over the UK even further in the years to come.


The UK's incoming prime minister – likely Liz Truss – will face a game of economic whack-a-mole after making it through the Tory leadership contest on Monday.


British inflation is at its highest in 40 years, with the Resolution Foundation predicting the largest squeeze in living standards in a century with real household disposable incomes falling by 10pc over this year and next.


Rising energy bills threaten to bankrupt small businesses and force two-thirds of UK households in fuel poverty by January.


The Bank of England estimated in August that GDP will fall by nearly 1pc in the last quarter of 2022 and slip further in the subsequent four quarters, meaning the UK will likely experience a recession lasting 16 months, as the war in Ukraine continues to drive up energy and commodity prices.


The size of India’s economy in nominal “cash” terms was $854.7bn in the first three months of this year when using the dollar exchange rate on the last day of the quarter, while the UK was at $816bn.


India’s rise above the UK is partly driven by the fact that the size of the two economies is calculated in dollar terms. This means a record sharp fall in the value of the pound will have further accelerated the trend.


The US remains by far the world’s largest economy, followed by China, Japan and Germany.


The CEBR economics think tank has previously predicted that India’s economy will overtake Germany in 2027.


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