In the old days, the monthly number that excited policymakers and journalists was the balance of payments. That was when fixed exchange rates caused concern that a big deficit would lead to a run on the pound and put pressure on our gold and dollar reserves. Once Edward Heath floated sterling, though, the trade statistics almost disappeared – until now. Today, they are back, but being viewed from a slightly different perspective.
The buzzword among economists for the past year or two has been “rebalancing”. Pre-recession growth was disproportionately dependent on spending by governments and consumers and too much of that spending was funded by borrowing. Today, with a large debt hangover, the UK needs to tap into different sources of spending to generate growth, profits and jobs. If the traditional UK customer base is boxed in, the balance has to tilt more towards exporting as the route to recovery.
A weaker currency (about 25 percent lower than pre-recession levels) making exports cheaper is a plus, probably outweighing the inflationary impact of more expensive imports. Global growth also matters, but the fact that 70 percent of the UK’s exports go to the European Union (EU) and the US – both high-income but underperforming areas – is a disadvantage. So far, the UK’s penetration of the BRIC economies has been disappointingly modest.
Yet the recent record has been encouraging. The UK’s export of goods and services in 2010 were up 10 percent in a year, with goods 17 percent higher. This underpinned the revival of manufacturing, so far the star performer in the UK’s recovery. But this followed an eight percent fall in total exports in 2009 (10 percent in goods) which means the value of exports was only a tad higher last year than in 2008. In volume terms, they were still 2.5 percent lower. And compared with the growth of world trade in 2010, and the rate at which exports from other EU countries have increased, the UK’s performance in 2010 does not look impressive.
The modest recovery in exports is put into sharper focus by the even faster growth of imports: 14.5 percent in 2010, with goods imports rising by 18.5 percent. The net position has, therefore, deteriorated. The deficit on goods and services jumped from £29.7bn in 2009 to £46.2bn in 12 months, with the deficit on goods last year a record £97.2bn. Although manageable in terms of a share of GDP (bearing in mind the positive contribution from invisibles), it does raise questions about the rebalancing and the pace of recovery.
Part of the explanation may lie in the so-called J-curve effect. Devaluation leaves the sterling price of exports unaffected but raises the price of imports, meaning that any amount of imports will cost more. So perhaps the UK is still in the deteriorating downswing of the J – before the real improvement kicks in. The rise in global commodity prices may also have deepened the J, implying the challenge facing exporters will take longer to navigate, particularly bearing in mind the UK’s dependence on more slowly growing markets.
There are, however, reasons for optimism. Sterling remains competitive (but this might be eroded if interest rates rise) and business surveys show strong positive responses to export prospects. And the government recognises, in its recent whitepaper on UK trade and investment, the importance of exporting and the difficulties faced by smaller companies breaking into new markets. There are modest proposals for support which have been welcomed by industry groups.
Just as the trade statistics are making a comeback, so are some of the old slogans from the 1960s, such as “export or die” or “exporting is fun”. Few people trying to sell overseas would claim exporting is fun, but their success could be the difference between growth and stagnation for the economy as a whole.
Read our analysis of the whitepaper on assisting SMEs breaking into emerging markets here