Sunday, September 16, 2012
Better news - but we should still mind the trade gap
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

We should celebrate and nurture good news. In the past few days there have been three sets. In Europe, the eurozone has moved further back from the brink, thanks to the German constitutional court decision to back, with strings, the rescue fund for its troubled members and the rejection by Dutch voters of eurosceptic parties. There is a long way to got but the sense of imminent euro collapse has gone.

Then, not for the first time, came excellent job numbers, with a rise of 236,000 in employment to 29.56m, within a whisker of its pre-recession peak four years ago.

The composition of employment has changed in that time, with a drop in full-time workers and a rise in part-timers. But these were very good numbers and, as before, hard to square with a stagnant economy, let alone a shrinking one.

It is gratifying to see some things going exactly according to plan. I expected private sector job creation to easily outstrip public sector job losses, as in the 1990s, and so it has. In the past three years, the private sector has added 1.36m jobs while the public sector has cut by 689,000.

There is a distortion to the figures from the reclassification of roughly 200,000 people who work in further education from public to private sectors. Adjusting for that still leaves 1.16m additional private sector jobs, against 489,000 public sector cuts.

It is the third bit of good news I want to concentrate on today. This was the sharp narrowing of Britainís overall trade deficit in July to £1.5 billion, from £4.3 billion in June, with the deficit on goods dropping from £10.1 billion to £7.1 billion.

Exports rose by 9.3% in value in July, while imports dropped by 2.1%. Proof that the great rebalancing of the economy towards exports is under way?

Maybe not, or at least not yet. As was suspected a month ago, the June figures were heavily distorted by the Jubilee bank holidays, which hit exports harder than imports. It is always unwise to draw conclusions from one monthís data, particularly when the distortions are so obvious.

There is still something to celebrate in the figures. The three monthly picture, shows the overall trade deficit narrowed to £8 billion in the May-July period from £10.5 billion in the previous three months.Export volumes rose 0.9%, excluding oil and erratics, while imports fell 0.8%.

Exporters are being hit by the eurozone crisis, while doing better in non-EU trade. So in the latest three months goods export volumes to the rest of the EU edged up by 0.3% but were down by 4.4% on a year earlier. Non-EU exports, in contrast, rose by 4.5% and were 12.5% on a year earlier.

The weakness of Britainís EU markets is one reason why it is too soon to celebrate the improvement in Britainís trade position. The fact that, even after Julyís improvement there was a £7.1 billion deficit in trade in goods is a rather bigger one.

Britainís deficit in goods, the so-called visible trade deficit, has been on a deteriorating trend for decades; Britainís last manufacturing trade surplus was in 1982.

In 1997 the deficit was £12.2 billion, rising to an alarming £94.1 billion in 2008. You might expect it to have fallen in the recession, and it did in 2009 to £82.8 billion. But then it rose again, hitting £100 billion for the first time in our history last year.

There are two worrying things about this. One is that the trade deficit is running at these record levels despite what should have been a huge boost from sterlingís 25% fall in 2007-8, most of which has stuck.

The second is that it has occurred despite the depressed level of consumer spending, still more than 6% down (in real terms) on pre-recession levels. If we have a £100 billion deficit with consumer spending subdued, heaven knows what will happen if it starts growing strongly.

Most of the time, the growing deficit on goods has been disguised by a rising surplus on services. Britain is second only to America as an exporter of services and the surplus on services has been almost a mirror image of the deficit on goods.

The services surplus, £18 billion in 1997, reached £76.4 billion last year. Services are keeping Britain afloat. The fear is that they may be less effective at doing so in future.

Michael Saunders, an economist with Citi, the bank, has used Eurostat data to show that while the volume of Britainís total exports (of goods and services) is up a marginal 0.1% compared with the recessionís eve in early 2008, this is well below the growth achieved by America, 12%, Ireland, 9.7%, Germany, 9.5%, the Netherlands, 9.2%, and Spain, 7.4%. One reason is service sector exporters, particularly in financial and business services, are finding life tougher as a consequence of the crisis.

What do we need to do? People often ask me why the trade figures no longer seem to matter much anymore. The markets did not bat much of an eyelid either when the very poor June trade figures came out a month ago, nor when the much better July numbers came out last week. These days capital flows, rather than trade, drive the currency markets.

Trade does matter, however. The trade gap remains a useful barometer of this countryís economic health, and of the ability of companies based here to compete in global markets.

Vince Cable, the business secretary, has begun to sketch out an industrial strategy, focused on ďsector strategiesĒ for key parts of the economy. The fact that industrial strategy carries connotations of Labour in the 1970s and that targeting sectors sounds suspiciously like picking winners has had some on the right foaming at the mouth.

That is silly. The Thatcher government in the 1980s had an industrial strategy of attracting inward investment, mainly from Japan, to revive Britainís car industry. I remember Lord Young, her business secretary (he preferred enterprise secretary) being mocked for predicting an eventual return to a trade surplus in cars.

But it has happened. Britain is this year heading for the first trade surplus on cars since 1976, with 80% of vehicles assembled in Britain intended for export If it can happen for cars, it can happen for a range of other products, and it is the ultimate test of the success of an industrial strategy. We really should mind the trade gap.