Sunday, May 31, 2015
Trade is such a drag for Britain's economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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

A new government is in place and we have had its first Queenís speech. As far as the economy is concerned, the two most important aspects of its programme are the referendum on European Union membership and the second-half of the deficit reduction programme.

On the first, of which much more no doubt in coming months, I still think it will be a story of some occasionally fraught renegotiation, followed by a yes vote, but we shall see.

On the second, the task for the Tories Ė given that many people seem to feel curiously cheated by the election result Ė will be to make deficit reduction seem fair. Without the cover provided by the Liberal Democrats, George Osborne will be under even greater pressure to demonstrate that we are all in it together. Anyway, more on that later too, in the run-up to and after the July 8 budget.

As always, what happens to the economy is not exclusively reliant on what politicians do. They can declare until they are blue in the face that they want to raise productivity but in the end the decisions by tens of thousands of private sector firms will determine whether it happens or not.

Similarly they can set a target, as Osborne has, for doubling Britainís exports but, again, in a period of slow world trade growth, they cannot guarantee it will happen.

Trade is a big issue for Britainís economy, as figures a few days ago showed. Against expectations of an upward revision in first quarter gross domestic product growth, the quarterly increase was left unchanged at 0.3%. Manufacturing and construction were stronger than first estimated but services a little weaker. Business services and finance appear to have had an unusually weak quarter.

In the detail of the figures, however, the standout drag on growth was what economists call net trade; exports less imports. Net trade, in fact, was not so much a drag as a giant millstone round the economyís neck.

So, while there was a decent 0.5% quarterly rise in consumer spending, an encouraging 1.7% increase in business investment and even a small 0.1% upward tick in government consumption, exports fell by 0.3% on the quarter, while imports jumped by 2.3%.

Putting all that together gives you the extent to which our poor export performance and appetite for imports impacts on growth. In the first quarter net trade reduced the change in GDP by 0.9 percentage points. Had the contribution of net trade to the economy been merely neutral, in other words, the rise in GDP in the first quarter would have been more than 1%, rather than just 0.3%.

Or, taking last year as a whole, 2014ís growth of 2.8%, which was perfectly respectable, would have been a heady 3.3% without the 0.5 point drag on growth from net trade.

These things move around from quarter to quarter, and the net trade picture in the first quarter was particularly disturbing. But, while there is some evidence of rebalancing in the pick-up in business investment, the opposite is happening when it comes to net exports.

Is there are any reason to think this might change? After all, this is not just a question of growth being stronger if exporters were doing better (and importers rather worse). Britainís large current account deficit, 5.5% of GDP, reflects weak investment income but also puts the onus on exporters of both goods and services to raise their game.

One source of hope is the eurozone. The stronger the growth bin the rest of Europe, the better Britainís exporters should do. The eurozone crisis, and its 2011-13 recession, which followed the deep 2008-9 downturn, were a factor in Britainís slowdown a couple of years ago.

The unfortunate thing about the first quarter numbers, however, was that they coincided with signs of stronger growth in the eurozone. Though I expect Britainís first quarter figure to be eventually revised higher, as things stand the 0.4% rise in eurozone GDP in the first quarter exceeded Britainís 0.3%.

Stronger eurozone growth could yet be threatened by the instability that would follow a Greek exit, though I do not expect that to happen. For the moment, however, even stronger growth in Europe is not helping Britainís trade position. If anything the opposite is happening.

A pick-up in world trade would help. The odd thing about the post-crisis global recovery has been that, while the rise in GDP has not been that bad, the recovery in world trade Ė after an initial spurt in 2010 Ė has been muted. Normally world trade would grow at double or more the rise in global GDP. That has not been happening, perhaps because of the weakness of trade credit, perhaps because of discreet protectionism.

The upshot is that, to the extent that exporters have geared up for a global trade upturn, and refocused their efforts on faster-growing emerging markets, they have got all dressed up with nowhere to go.

What about the exchange rate? Many blame the strength of the pound for Britainís disappointing export performance. But sterling is below its long-term average against the dollar and does not look fundamentally overvalued against the euro. The fact that exports did not respond well to sterlingís 25% fall between November 2007 and early 2009 suggests we should look elsewhere for the causes of the problem. Maybe a more stable currency would help, though attempts to stabilise sterling in recent decades have ended in tears.

There are two sides, of course, to net trade. Our appetite for imports continues unabated, not just because of consumers. Many manufacturers rely on imported components. Another aspect of disappointing trade performance has been the absence of import substitution among both consumers and business buyers. Again, this is not obviously in the gift of government.

It would be good to predict better times ahead for trade. If you wanted to be optimistic you would look at Britainís service sector exporters, many of whom genuinely are world beaters. Even in a disappointing first quarter, Britainís service sector exports totalled nearly £55bn and exceeded service sector imports by more than £22bn.

But if you wanted to be gloomy you would look at those first quarter GDP figures and conclude that one of our traditional Achillesí heels is continuing to hold us back, and will continue to do so. The traditional complaint, that we do not make enough of what we want to consumer, has some validity.

Britainís trade performance, like Britainís productivity performance, needs to improve. As things stand, it is not obvious that it will do so.