In the latest analysis by the World Economic Forum the UK is 10th out of 148 countries.
The Forum blamed the deficit, public debt and the low savings rate as the main factors for the drop as well as a slight fall-off in the performance of financial markets.
Japan (ninth, up one) and Hong Kong (seventh, up two) overtook the UK, wiping out last year's two-place boost.
As recently as 2006, the UK was ranked second.
A flexible labour market "in sharp contrast" to the rigidity of European rivals puts the country fifth on that score while the sophistication and innovation of British businesses ensure ninth and 12th places on those measures.
"The highly developed financial market also remains a strength overall, despite some weakening since last year," the forum said.
Germany and the US gained two places to stand fourth and fifth. The top three - Switzerland, Singapore and Finland - remained unchanged on last year.