Sunday, January 17, 2010
If exports don't bounce, neither will the economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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It is the big question after any recession. Where will the growth come from? A big part of the answer, this time at least, has to be from exports.

Consider the evidence. For more than a decade, from late 1996 to the autumn of 2007 (the fall of Northern Rock), sterling was overvalued on average and especially against the euro. Then it came down to earth, to the point where it is clearly undervalued against the euro and competitive against other currencies.

This was not a deliberate policy aim of the Bank of England or Treasury (if it had been, the pound would probably have gone up) but a happy accident an essential ingredient in rebalancing the economy.

Exhibit two is the fact that, after a dreadful 2009, when world trade slumped more than 12%, a post-war record, it is now recovering. That recovery will gain momentum this year and next. Though many people are sniffy about Britain's exporting abilities, mainly because of our appetite for imports, one thing we know is that when world trade grows, UK exports do well.

The recovery in world trade, at a time when demand in Britain can be expected to be more constrained than in the recent past for a variety of reasons is another happy accident, though skewing growth away from the consumer has been an ambition of policymakers for years.

So the conditions are in place: there has been no acceleration in wage inflation to undo the competitive advantage of a lower exchange rate (the opposite, in fact). Will it be an export-led recovery?

Yes, according to the Ernst & Young Item club, which has a new forecast out tomorrow. "Growth is almost totally dependent on a sustained upturn in the world economy and upon the energy and enterprise of UK exporters of our prized goods and services, from whisky to water pumps, and education to entertainment, to cash in on a rebound in world trade," said Peter Spencer, its economic adviser. "But let's not be under any illusion this high-wire rebalancing act is going to be very challenging."

Item's numbers suggest, however, that it will happen. This year will not be much to write home about, even for the most
far-flung exporter. Item predicts that exports will rise by 5.7% but imports by 6.6%, within the context of just 1% overall growth in the economy.

If Item is right, however, the three years from 2011 will be a golden age for exporters, with growth of 9%, 9.5% and 8% respectively, easily outstripping imports and propelling the economy as a whole along at a decent pace of about 3%.

History is on the side of a decent export-led recovery. Three things we learnt from the upturn after the recession of the early 1990s were that first, the budget deficit comes down faster than you expect; second, that inflation as a result of a big fall in the exchange rate does not last in an economy with plenty of spare capacity; and third, that it is indeed possible for the UK to have export-led growth.

The big current-account deficit of the Lawson boom of the late 1980s, nearly 5% of GDP, was all but eliminated by 1997.

The issue of export-led growth came up, too, at a joint monetary policy seminar with the Centre for Economic Policy Research (CEPR) last month at the Bank of England. In Bank-speak, the verdict was that exports should do the trick, though with caveats. "It was thought that the significant exchange-rate depreciation since the summer of 2007 should boost exports and reduce imports in the coming quarters," it concluded.

The caveats were mainly about the squeeze on credit available to exporters, depriving them of the opportunity to take advantage of the situation and the fact that firms are often very slow to compete on price. Many exporters have left their local-currency prices where they were, preferring to take the benefits of sterling's lower level in higher margins.

The economists at the Bank-CEPR seminar were right to add caveats, though credit constraints should ease over time and it is normal for exporters to respond initially by widening margins, only later exploiting the advantage of a competitive exchange rate to increase market share. Do not forget, too, that rising exports are only part of the story the other being slower growth in imports. As far as GDP is concerned, it is "net" exports that matter.

How do we square the idea of an export-led recovery with the fact that manufacturing is so clearly still in the doldrums? Official figures last week showed that manufacturing output in November was flat for the second month in a row, marginally down on the start of 2009, and 14% down on its pre-recession level in 2007.

Even a manufacturing optimist would concede that it will take four to five years to get back to where industry was before the recession. A competitive pound has not stopped the closure of the Bosch factory in Cardiff, with the loss of 900 jobs.

The Engineering Employers' Federation last week predicted "a long slow haul to recovery" for manufacturing, with growth of only 1.2% this year, though admittedly followed by 3.4% in 2011 on the back of stronger exports.

We would all like to see a bigger and faster revival of manufacturing, and for rebalancing to achieve something that is as rare as hen's teeth in economic history: industry increasing its share of the economy after a prolonged decline.

It is important to also bear in mind, however, that not all of Britain's exports are screwed together in factories. More than two-fifths of UK exports are in services. Some of the brightest prospects are in those services where Britain was competitive anyway, and which will receive a further boost.

This includes, as well as much-maligned financial services, Britain's strong business services sector. It includes the law, the creative and media industries, healthcare, education and civil engineering. It takes in biotechnology, where Britain is second only to America, as well as software, where there are more than 100,000 independent UK firms.

So it can happen, and indeed it probably has to. Britain's exporters have taken too much of a back seat in recent years. Now their time has come.

PS: Only eight days to go until the release by the Office for National Statistics (ONS) of GDP figures for the fourth quarter and the excitement is almost unbearable. With it, however, goes a bit of nervousness. This is the quarter, of course, which should show the emergence of the economy from recession. If it doesn't, many economists will be inclined to hang up their abacuses. From all the evidence we have, it should happen. Even the double-dippers need a quarter of growth to dip from.

The trouble is that the ONS is good at snatching defeat from the jaws of victory. My nervousness was heightened by the National Institute of Economic and Social Research (NIESR) estimate of growth of 0.3% in the fourth quarter.

Why should this be worrying? You have to go back to last spring for the first time NIESR declared the recession over on the basis of its monthly GDP calculations. In September it reported a return to growth 0.2% in the three months to August before subsequent figures dashed these recovery hopes.

I don't blame NIESR for this. In time, I suspect, its recovery profile will have been shown to be right, though data revisions will also eventually change its verdict that last year was the worst for the economy since 1921.

From The Sunday Times, January 17 2010