Whatever happened to the Export-Led Recovery?
The UK's deficit on trade in goods grew to £10.1 billion in June, with exports down by 8.4% and imports by 1.2%. The deficit was well in excess of what had been predicted, and was the worst figure since the current run of trade statistics began in 1997.
The £10.1bn deficit in trade in goods was only partially offset by a £5.8bn surplus on services. Moreover, the trade gap for the second quarter (which gives a better picture of trade trends than volatile monthly figures) rose from £7.8bn to £11.2bn. In the three months to June, the overall value of exports fell by 2.7%, while imports were largely stable.
The bad news came as a big blow for the government which had been pinning hopes on exports helping to drag Britain out of recession. Meanwhile, after the economy contracted by a dismal 0.7% in the second quarter of 2012, the Bank of England cut its growth forecast for 2012 to zero. Even that is optimistic.
The poor trade figures also prompted calls for the government to provide more support for exporters struggling with falling demand overseas for their products. The British Chambers of Commerce (BCC) called on the government to boost infrastructure spending, to create a new investment bank and to assist more with trade, promotion and insurance.
It has a point, on a number of levels. Firstly, the UK lags other countries in terms of support offered to exporters - such as in short-term trade credit guarantees, and the dysfunctional banking system makes it difficult for small firms in manufacturing to access finance to export.
Secondly, the extended period of exchange rate over-valuation - as we saw in the 1980s and again in the late 1990s/early 2000s - meant that some UK exporters left overseas markets. While a 25% depreciation of sterling over 2008-9 helped them regain competitiveness, they then faced a 'sunk cost' of getting back into those markets. A period of under-valuation may be needed to help them do that, or in the absence of that, support from the government. That's been lacking.
Thirdly, we've anyway seen that depreciation boost begin to unwind recently, with sterling rising, against the euro in particular, where it's up by 15% this year. At the time of writing, the pound is trading at €1.267, just off the July peak of €1.29 but still higher than at any time since the financial crisis in late 2008. That has reduced the price competitiveness of UK exports.
And while the UK's export performance has been hindered by the eurozone crisis, a wider slowdown is now also having an impact. The Office for National Statistics said that Britain's deficit with the EU rose by £0.5 billion in June to £4.9bn, while the deficit with the rest of the world also widened by £1.3bn to £5.2 billion. For the second quarter of 2012, the EU deficit increased by £1.8bn to £14.1bn and the non-EU deficit grew by £1.5bn to £14.2bn (more detailed figures can be seen here).
While you would expect exports to Eurozone countries like Italy and Spain to be down, the fact that exports to the US and China also fell is alarming as UK exporters were being encouraged to look beyond the Eurozone for new markets. For example, car exports were down (by £0.2 billion in June), especially to China.
While some pointed to disruption to shipments caused by extra holidays for the Queen's jubilee, this misses the point. If ports were closed for a bank holiday then they weren't importing as well as exporting, and this shouldn't have had a profound impact on the trade figures.
The government, of course, had hoped that an ultra-tight fiscal policy would mean a loose monetary policy, low interest rates, more QE and a weak pound, thereby boosting exports and rebalancing the economy. It's not working out that way.
The recent PMI figures on manufacturing and the widening trade deficit both suggest that the much-hoped for rebalancing (to making things and exporting things) simply isn't happening, for a number of reasons.
Firstly it's because manufacturing is again in decline (the 'March of the Makers' is now firmly in reverse). Secondly because demand for UK goods is falling not only in the Eurozone but also further afield - including China. Thirdly, what's left of our wider manufacturing base simply doesn't have the capacity to help the UK export its way out of trouble.
Linked to this, we don't have enough of an industrial strategy that actively supports exporters; for example small firms in some sectors could potentially access overseas markets but can't gear up to do so because of the weaknesses of the banking system (hence the need for a new state-backed business bank and more support for exporters).
Back in June 2010 the incoming Chancellor George Osborne stated that "our policy is to raise from the ruins of an economy built on debt a new, balanced economy where we save, invest and export".
It hasn't worked. Since then the economy has actually contracted. Rebalancing has gone into reverse, investment has stagnated and exports are not growing. Current policies simply aren't working, even in terms of the government's own objectives.
Of particular note here is the point that rebalancing isn't going to happen automatically - we need a more active industrial strategy to push things along.
Professor David Bailey works at Coventry University Business School.