Sunday, July 14, 2013
Exports becalmed on a sea of disappointment
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.

There is no other way to describe Britain’s trade performance than as becalmed. Exports, which were supposed to drive Britain’s recovery, have mainly stayed at home. The question is whether they will continue to do so.

According to figures released a few days ago by the Office for National Statistics, Britain had a trade deficit in goods and services of £2.4bn in May, split between an £8.5bn deficit on goods and the traditional surplus on services, in this case £6.1bn.

If you were looking for progress on Britain’s external trade, you would not find it in these figures. A year earlier, in May 2012, the overall deficit was smaller, £2.1bn.

Looking for a trend in these numbers, in either direction, probably does not make sense. The trade deficit is flat, stuck or, as I say, becalmed. Rather than making the hoped-for big contribution to growth, net trade - exports minus imports - has effectively done nothing to boost the economy.

The only year it did, 2011, it added 1.2 percentage points to growth, the effect previous experience suggested was achievable over a sustained period. But 2011 was bookended by 2010, when net trade subtracted 0.5 percentage points from growth, and 2012, when it did so by 0.6 points.

This does not mean there has been no growth in exports since the low point of the recession in mid-2009. Exports of goods and services in volume terms are up by 13.3%. But imports, which are of course bigger, are up by 10.2%.

Exports are fractionally below their pre-crisis peak, recorded in the second quarter of 2008, though to be fair imports are down rather more. To the extent there has been any rebalancing, that is the extent of it.

Nor have things gathered momentum as the recovery has progressed. On a slightly different measure, the value of trade, the ONS notes “the value of both exports and imports has remained flat since mid-2011”.

The big picture is that in an age of instability, Britain’s trade deficit has been remarkably stable. Pencil in between £23bn and £24bn for the quarterly deficit in goods trade and you will not be far wrong.

Since the beginning of 2007, the quarterly goods deficit has moved within a narrow, £19.6bn to £27.8bn range, and between 5.6% and 7.2% of gross domestic product. The earth has moved but the trade deficit has not.

Were we wrong to expect export-led growth on the back of sterling’s sharp fall in 2007-8? The pound’s average value fell by nearly 30% between the middle of 2007 and the end of 2008 and remains roughly 25% below pre-crisis levels.

The template was the performance of exports after the rather smaller sterling devaluation when sterling plunged out of the European exchange rate mechanism in September 1992. Over the following four years, a sterling fall which reached a maximum of 17%, was enough to drive a 37% rise in the volume of exports.

Conditions have been different this time, of course. All advanced economies, which comprise most of Britain’s export trade, have been struggling to shake off the effects of the crisis and are experiencing slow growth.

For a time there was a clear distinction between Britain’s exports to the European Union, which were falling by roughly 10% a year, and the rest of the world, where they were rising at a similar rate.

That gap has narrowed. Over the latest 12 months, exports to the EU, in value terms, are down 1.1%, while non-EU exports are up a modest 2.6%. There are some bright spots within that; exports to China are up 18% and those to Japan by 8%. But there are not enough of them.

Weak growth in markets is one thing, though the Bank of England noted in its last inflation report that Britain’s share of world trade has also been declining.

What ails exporters? I go to a lot of meetings at which, with the encouragement of UK Trade & Investment (UKTI), the official body, exporters are urged to step up their efforts and given official help to do so.

There is no lack of enthusiasm, among companies large and small. Exploiting export markets, particularly new ones, is not an easy business, however. It requires investment, something credit-constrained smaller firms, in particular, are cautious about committing to. It involves taking risks. which risk-averse businesses are keen to avoid.

It also requires, for Britain’s economy, a significant change of emphasis. After the post-ERM export boost of the 1990s, Britain settled down to growth driven by domestic demand. Between 1998 and 2007 net trade substracted an annual average of 0.1 percentage points from growth.

Firms got out of the exporting habit and, in recent years when they needed to, have not priced to compete in overseas markets, despite the advantages of a low pound. Enthusiasm for exporting is not enough.

Can things change? Recent surveys have been positive on exports, including the British Chambers of Commerce quarterly survey which suggested service sector exports are at their best in the survey’s 24-year history.

The Ernst & Young Item Club, in a report to be published this week, suggests a 4.6% increase in export volumes next year, after a modest 1.2% this year.

“There are hopeful signs for the world economy, which will lead to a pick-up in demand from the UK’s key export markets,” says Peter Spencer, its chief economic adviser. “The US has successfully negotiated the fiscal cliff, the Chinese economy is beginning to rebalance away from investment to consumption, and there is also a move towards pro-growth policies in the Eurozone. If managed successfully these factors could be a real boon for UK exporters.”

Let us hope so. So far, however, waiting for export-led growth has been a triumph of hope over recent experience. It could stay that way.