Every month I look for the promised improvement in Britain’s trade performance on the back of a super-competitive pound, which is 24% below pre-crisis levels. And each time I am disappointed.
Last week was a particular disappointment. It brought the release of official trade statistics for December and the whole of 2010. In December, Britain ran a trade deficit in goods and services of £4.8 billion and a deficit in goods alone of £9.2 billion. The former has rarely been bigger. The latter has never been larger.
There is some evidence that December’s trade, as with other things, was adversely affected by the weather. There was an echo of 1970, and Harold Wilson’s surprise election defeat then, in that the deficit was also swelled by a jump in aircraft imports.
The underlying picture, however, is also pretty awful. For 2010 as a whole the deficit on goods and services was £46.2 billion, up from £29.7 billion in 2009. The deficit on goods alone was £97.2 billion, up from £82.4 billion. Both were annual records.
After improving in 2009, Britain’s trade position took a decided turn for the worse last year. The great rebalancing of the economy, sustained export-led growth on the back of a low pound, is not happening. Before the Bank of England’s decision to keep interest rates on hold on Thursday, which was widely expected despite growing pressures on the monetary policy committee (MPC) to act, some business groups warned against a rate hike that would push sterling higher.
So far, however, the economy appears to be getting all the pain from a weak pound with higher import prices and chronically above-target inflation, and none of the gain in terms of export-led growth.
You may be a bit puzzled by this. After all, almost every survey suggests that Britain’s exporters are having a bumper time, with order books booming.
That, indeed, is what the official figures confirm. In the past year, despite those disappointing trade balances, Britain’s exports of goods and services have risen more than 10%. Exports of goods alone are up 17%, driving the manufacturing revival.
There are two sides to the trade balance, and I will come on to imports in a moment. Even Britain’s export performance, however, is not quite as special as it looks. After world trade collapsed in 2008-9, its revival has been impressive. A 2009 world trade fall of around 12% was followed by a 12%-13% rise last year.
Many countries exporters’ have done well in this context. Germany’s exports rose by 18.5% during last year; Greece’s increased by nearly 22%.
Nor does Britain’s manufacturing performance, driven by exports, stand out from the pack. Far from it. Its 4.4% growth over the latest 12 months compares with 7% in France and 10% in Germany. Neither had the benefit of Britain’s big devaluation. Sterling is not proving to be the hoped-for elixir for exporters.
On its own, the performance of Britain’s exporters would be enough to generate export-led growth. The trouble is, Britain’s importers have also been working overtime. So the growth rate of all imports over the past year has been 14.5%, and the growth of goods imports alone, 18.5%.
It may be an obvious point but it is impossible to have true export-led growth if that growth is matched, or as it has been exceeded, by the rise in imports. What matters as far as economic growth is concerned are net exports (exports minus imports). Until next exports are rising, there can be no export-led growth.
Why are imports so strong? A traditional piece of economic analysis is the J-curve. The effect of a devaluation is to leave the sterling price of exports unaffected but raise the price of imports. We have to pay more to import a given amount. Only later do trade patterns shift and, because goods made in Britain have become more competitive and goods made elsewhere less so, the net trade position improve.
It is possible, therefore, that – starting on the left-hand side of the “J” – we are still in the deteriorating phase but improvement is on the way. Sterling’s fall mainly occurred, however, during the the latter part of 2007 and all of 2008. Surely by now we should be in the improvement phase?
The other argument is that the sharp rise in global commodity prices, from 2009 onwards, has had the effect of elongating the J-curve and producing a sharper shift into deficit. Mervyn King pointed out recently that since 2007 sterling oil prices have risen by 110% and gas prices by 130%.
These are all important caveats. The bottom line, however, is that sterling’s fall has done little to dull our appetite for German cars or Korean televisions. Imports of manufactures grew faster than exports last year.
We should not give up on the export-led growth strategy. Vince Cable, the business secretary, chose a good day to bury good news last week, the day the trade figures were released the Project Merlin announcement on the banks.
His trade and investment white paper offered more export support to small and medium-sized firms, increased the emphasis of UK Trade & Investment, the official body, on emerging market economies, and called on Europe to de-regulate to improve access to the single market for smaller exporters.
These are the kind of things that will matter over the medium and long-term, as will the quality and desirability of British exports.
None of it will be to any avail unless, however, we can also curb our enthusiasm for imports. Weaker consumer spending will help in the short-term, as happened in 2009. In the long-term, we have to make more of the things here that, for a variety of reasons, we import from abroad.
We probably knew devaluation was no magic bullet and carries important disadvantages in return for only minor advantages. We have discovered it again.
My regular piece is available to subscribers on www.thesundaytimes.co.uk. This is an excerpt.
Originally published at David Smith’s EconomicsUK and reproduced here with permission.