The heart of the Square Mile in London looks the same as it did 100 years ago. The Mansion House is off to the left and Cheapside still rises gently up the hill towards St Paul’s Cathedral. Closer inspection, though, shows that the Royal Exchange is now a high-class shopping mall, where City workers can browse at lunchtime for Hermès scarves and Gucci handbags. It is no longer the hub of the City, let alone the beating heart of the most powerful nation on Earth.

London remains one of the globe’s three financial centres, dominating that slice of the day after night falls in Tokyo and before day breaks in New York. But the City’s centre of gravity has moved several miles east to Canary Wharf on the Isle of Dogs, where most of the investment banks now have their European homes, and west to the cluster of hedge funds behind discreet nameplates in Mayfair. Only a few of the biggest financial institutions are now British-owned, the so-called Wimbledon effect, where London hosts the world’s best but lacks domestic champions of its own.

It has been three-quarters of a century since Fred Perry was the last Briton to capture the men’s singles title on the grass courts of SW19, in the era when sterling could seriously be considered the world’s premier reserve currency. Some would say the pound never recovered from the first world war. From the moment the UK finally came off the gold standard in 1931, the story has been one of devaluations of the currency once in every generation in an attempt to price uncompetitive exports back into global markets: officially in 1949, 1967 and 1992; as a result of market forces in 1976, and again in 2007, when the onset of the global financial crisis saw the pound depreciate by 30%.

Lombard Street has changed, too. Of the five big high-street banks, one is operated out of Hong Kong, one out of Madrid and two out of the Treasury in Horse Guards Road. The financial crisis of 2007-8 resulted in two banks – Lloyds and the Royal Bank of Scotland – being part-nationalised by the government, with all the others taking advantage of various Bank of England schemes that allowed them to trade in worthless “assets” for gilt-backed securities and to fill their coffers with newly minted electronic money.

The cotton and woollen mills are long gone, as are many of the companies in the electronics and motor vehicle sectors that flourished briefly in the 1930s and again after the second world war. The decline of British manufacturing is symbolised by the fate of Longbridge in Birmingham. At the end of the 1960s, it was the largest car plant in the world, employing 250,000 people, but after the collapse of MG Rover in 2005, most of the site was sold off for commercial and residential use. There are still a few car workers at Longbridge, but they are employed by the Shanghai Automotive Industry Corporation. The old Morris plant at Cowley, on the outskirts of Oxford, has survived and is still churning out the Minis that, along with Mary Quant dresses and the Beatles, were the symbols of the swinging 60s. The plant, though, is owned by BMW of Bavaria. It is a similar story for Jaguar and Land Rover, run by the Indian company Tata.

Gone, too, is the oil that briefly, in the 1970s and 1980s, offered the promise of a windfall to finance industrial regeneration. The oil wells are all but dry, so Britain is no longer a beneficiary of high crude prices caused by strong demand from the emerging world and the gradual decline in production from fields where oil is cheap to extract. Oil and gas are imported from Russia and the Middle East, nuclear power stations are coming to the end of their lives and Britain has only a handful of working coalmines. The words used by Sir Edward Grey in 1914 now have a more literal meaning: the lights are about to go out.

In the hundred years from 1914 to 2014, the century since the outbreak of the first world war, the UK will have declined from pre-eminent global superpower to developing country, or “emerging market”. The symptoms of this vertiginous plunge in the world’s rankings are already starkly apparent: a chronic balance of payments deficit, a looming shortage of energy and food, a dysfunctional labour market, volatility in economic growth and a painful vulnerability to external events.

Since the start of the crisis, the UK has borrowed more in seven years than in all its previous history. It has impoverished savers by pegging the bank rate well below the level of inflation, and indulged in the sort of money-creation policies normally associated with Germany in 1923, Latin American banana republics in the 1970s and, more latterly, Robert Mugabe’s Zimbabwe.

Then there is the large number of unproductive workers engaged in supervisory or “security” roles, on the streets, in public parks, on the railways and at airports. There are the wars fought without the proper resources to do so, and the awareness among military commanders that, in the absence of any military conflict, their forces will be shrunk further, there being no attempt objectively to assess the nation’s enduring defence needs. There is the ramshackle infrastructure existing in parallel with procurement contracts that run billions of pounds over budget and are then cancelled.

If these are the big indicators of imminent relegation, the smaller ones are too numerous fully to catalogue. Thus the UK government has unveiled a “tourism strategy”, in the manner beloved of developing countries the world over, and the annual allocation of places at state schools has disclosed such an enormous shortage that the authorities have resorted to lotteries and other forms of rationing, rather like the “rolling blackouts” seen in post-colonial countries that have allowed their power stations to decay.

On 21 March, chancellor George Osborne, in his Budget speech, acknowledged that the UK was now in competition not with Germany or the US but with emerging economies: “Do we watch as the Brazils and the Chinas and the Indias of this world power ahead of us in the global economy; or do we have the national resolve to say: ‘No, we won’t be left behind. We want to be out in front’?”

Elsewhere in his speech, he made this telling aside: “[We are] working to develop London as a new offshore market for the Chinese currency.”

Not only is the UK supposedly averse to offshore financial centres, believing them to be hotbeds of tax evasion and money laundering, but deliberately setting out to create one has been the act of developing nations around the world, from Panama to the Seychelles, not of mature, developed economies.

This summer will be the third time that the Olympic Games has been held in London. On the first occasion, in 1908, the UK was the world’s superpower. On the second, in 1948, the UK was the one country in western Europe not completely devastated by six years of total war, but it came a poor third to the US and the Soviet Union in geopolitical influence. By 2012, the UK has joined the ranks of the nations that see the Games as a way of showcasing themselves or of getting the taxpayer to fund extravagant regeneration schemes that would not have been seen as financially viable in other circumstances. Neither Herbert Asquith nor Clement Attlee felt the need, as David Cameron apparently did at the Davos meeting of the World Economic Forum in January 2012, to cajole business leaders to come to the UK for the 16 days of the London Games so that they could eye up investment opportunities. The foreign journalists who flew into London to do their pieces about Swinging Britain in the 1960s and Cool Britannia in the 1990s will now come to write long think pieces about what a de-developing country looks like.

A developing economy – or strictly, in the case of the UK, a de-developing economy – exhibits certain features. It cannot find work for all its young people, and contains a large number of unemployed graduates, traditionally a major source of social tension. Despite this, it imports workers from abroad to fill the gaps left by its own dysfunctional education system, and it supplies beer money, in the form of cash benefits, to its hard-to-employ native workers. Its economic policies lack clarity: on tax, on inflation, on public expenditure. It is particularly vulnerable to price movements in major world commodities. Above all, and perhaps in summary of these symptoms, it is weak, dependent on outsiders for finance, skilled workers and energy supplies.

The UK accounts for just 3% of the goods exported globally, down from 4.4% at the turn of the millennium, and is a net importer of industrial products, food and energy. Put simply, it used to be a great manufacturing nation but is one no longer. The City has replaced manufacturing as the hub of the economy. Those in charge of the finance sector rook their customers and shareholders to become filthy rich. Pay and rewards are skewed heavily towards the top 1% of earners. Everybody else has to put up with wage restraint, but is able to consume more by virtue of the City’s willingness to load everybody up on debt and the Bank of England’s willingness to facilitate asset-price bubbles by keeping interest rates low. Most work is in low-skill jobs, with large dollops of public spending used to create for graduates white-collar jobs that would, in previous eras, have been held down by school leavers. This process is going to continue; by 2040, and perhaps sooner, the UK will have dropped out of the list of the 10 biggest economies in the world.

Does this matter? In one sense, no. Provided the UK gets richer decade by decade, it does not matter that other countries will be getting richer more quickly. Given that countries such as India, Brazil, Indonesia and Turkey lag behind in terms of incomes and technological knowhow, a period of catching up is both inevitable and desirable. Furthermore, it wouldn’t matter were these emerging giants to become richer than us in absolute terms. Were the average Turk or Brazilian to be wealthier than the average Londoner, Ulsterman or Yorkshirewoman, that would be unimportant, provided UK living standards continued to rise and the economy continued to generate the surplus wealth needed for both commercial investment and the purchase of social goods such as medical treatments and other types of welfare.

But this is a big proviso. The danger is not that we will lose our place in some global club or other. Such an outcome may dent the pride of our leaders as they are denied a place in a prestigious venue, but would be of little concern to ordinary people. The genuine worry is that we will endure falling real living standards – actually get worse off.

It has happened before, but only for short bursts, in 1974, 1976, 1977 and 1981. It happened again in 2010 and 2011, which suggests it is becoming something of a modern-day habit. To arrest and reverse our current “submerging” status, we need a development model. There is no miracle cure, but there are lessons to be learned, not just from the postwar history of the developed world, but also from the emerging market economies that are rapidly approaching in Britain’s rear-view mirror.

It is not just a question of adopting a different system of taxation or limiting the ability of the commercial banks to create credit – however commendable those individual ideas may be in themselves. One hundred years of pretending to be a “big beast” have to end now. There has to be an acceptance, like that in Germany, France and Japan in 1945, that the country has hit rock bottom and needs to change. In football, this happens all the time: a new manager goes to a struggling club and proceeds to clear out the dead wood. This has never happened to the UK, and even now the country does not seem ready for the sort of cathartic moment that the defeated Axis powers had at the end of the second world war. Even now there is a belief that all will be well, that something will turn up, that Britain will muddle through. The temptation, as ever, will be to look at the events of the past decade as another occasion where disaster was averted by a whisker. The reality is different: this is the moment when the UK has to face the truth about its diminished status in the world.

• Extracted from Going South: Why Britain Will Have A Third World Economy By 2014, by Larry Elliott and Dan Atkinson, published by Palgrave Macmillan on 14 June at £14.99. To order a copy for £11.99, with free UK p&p, visit the Guardian Bookshop.