Sunday, May 05, 2013
Britain starts to pull away from Europe
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

QM2.jpg

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

On Thursday the European Central Bank (ECB) cut its official interest rate from 0.75% to 0.5%, its president Mario Draghi citing the fifth successive quarterly decline in gross domestic product (the eurozone has only escaped a triple-dip because it is still in a double-dip) and very weak economic sentiment.

Economic weakness has spread from the periphery to ďcoreĒ economies such as Germany, France and the Netherlands, which had been doing much better. While the ECB expects an improvement in the eurozone economy later in the year, it warns that the risks are on the downside.

The English Channel is not that wide but it seems some clear blue water is opening up between Britain and the eurozone. It has been there for some time when it comes to unemployment. Eurozone unemployment, at 12.1%, is more than half as much again as Britainís 7.9% rate. Youth unemployment, which ranges as high as 59% in Greece and 56% in Spain, is also significantly higher on average.

Britainís growth performance, while nothing to write home about, is also beginning to pull away from the eurozone. The latest forecast from the National Institute of Economic and Social Research is for another year of recession in the eurozone, with gross domestic product contracting by 0.4% after a 0.5% fall last year. It predicts that Britain will grow by 0.9% following last yearís 0.3% rise. Next year it expects 0.9% growth in the eurozone but 1.5% in Britain.

These differences do not, of course, alter the big picture of a weak recovery in Britain, or the fact that there is nothing to celebrate about Europeís troubles, given the dependence of the UK economy on eurozone trade.

Even on that, however, there are signs of something stirring; a hint of the necessary rebalancing away from excessive reliance on Europe.

The latest Markit purchasing managersí index for Britainís manufacturing sector showed a rise from 48.6 in March to 49.8 in April, while its eurozone equivalent slipped from 46.8 to 46.7.

More importantly, Britainís manufacturers reported the strongest rise in export orders since July 2011, driven by ďincreased sales to clients in North America, the Middle East, Latin America and AustraliaĒ. Eurozone export orders, by contrast, remained depressed.

This is part of an ongoing story. In 2008, Britain exports of goods to the rest of the EU totalled £142bn. They slumped to £125bn in 2009, recovered to £142bn in 2010 and grew well in 2011, rising to £159bn. But last year they dropped again to £151bn, helping to explain 2012ís weak GDP growth.

Exports to the rest of the world, in contrast, fell by less in the crisis - dropping from £110bn to £103bn from 2008 to 2009 - but have been rising since: £124bn in 2010, £140bn in 2011 and £149bn last year.

It has been nip and tuck in recent months whether exports to the rest of the world are marginally higher or lower than those to the EU. In the latest three months, non-EU exports were ahead, and this is likely to be the shape of things to come.

Comparing 2012, when there was a rough 50-50 split between EU and non-EU exports, with the position 10 years earlier, shows how things are changing. In 2002 nearly 62% of exports went to the EU. This is quite a shift.

Though Britainís top five export destinations last year - America, Germany, the Netherlands, France and Ireland, in that order - were the same as three years earlier, plenty is happening further down the list.

China is now Britainís seventh largest export destination (from ninth in 2009) and Russia is up from 22nd to 12th. The old chestnut about Britain exporting more to Ireland than Brazil, Russia, India and China put together, has not been true for a while. Last year 7.9% of exports went to the BRICs, 5.8% to Ireland. Not a big enough shift yet but a move in the right direction. A decade ago only 2% of exports went to these economies.

Britainís biggest exports by category last year, incidentally, were mechanical machinery, electrical machinery, medicinal and pharmaceutical goods, and cars.

It seems reasonable to plan on the basis of European markets continuing to be weak, as the eurozone crisis plays out. The structural, fiscal and demographic challenges Europe faces argue for subdued growth, at best, in coming years.

The question is whether Britainís exporters can do more than just substitute stronger markets elsewhere for eurozone weakness, but create a long-lasting upturn on the back of the faster-growing parts of the world.

When economists look for a rapid response from exporters they often underestimate the challenge firms face in establishing themselves in new markets, a challenge that is particularly acute for smaller firms. These things cannot be just turned on with the flick of a switch, they require planning and investment and help from official bodies such as UK Trade & Investment (UKTI).

But there are at least some reasons to be optimistic. Research by the EEF, the engineering employersí federation, suggests firms are gearing up rapidly in emerging markets, with a clear majority of the businesses it surveyed planning to invest in the development of these markets.

The EEF notes that the fastest growth in Britainís exports over the past six years has been to Qatar, China, Russia, Brazil, Thailand, India, Australia, Singapore, Norway and Malaysia.

The main problem, it found, was that firms encounter protectionism in countries like Brazil and Russia, and threats to their intellectual property in China.

The governmentís aim is to increase Britainís exports of goods and services to £1 trillion by 2020, from £488 billion last year. It is a huge challenge, requiring export values to grow more than 9% a year, with most of the heavy lifting in exports to the emerging world. But it is challenge exporters have to take up - they need it to succeed. So does the rest of the economy.