The banking crash was a wake-up call: too much reliance on City of London financial services and complex paper shuffling, not enough on manufacturing – and on manufacturing exports in particular.
But three years on, the Great Rebalancing is barely in evidence. Indeed, last week brought trade figures showing the deficit on the UK’s trade in goods and services widened sharply from (an upwardly revised) £2.5 billion in January to £3.4bn. The import bill was broadly unchanged, and services exports held up, while exports of goods fell by 3.4 per cent.
A simple explanation for this worsening performance would be the continuing sovereign debt turmoil in the Eurozone and austerity programmes driving several of the southern Eurozone economies into ever deeper recession. But the UK’s goods trade deficit with the rest of the EU has remained largely stable over the past year. It is our goods exports to non-EU countries, in particular the US, Russia and China – where the figures have turned down.
A 16 per cent slump in car exports marked a particularly sharp reversal from the previous month’s 31 per cent rise, with car sales in China down 1.8 per cent for the first three months of 2012 compared with the same period last year.
All this brings two problems sharply into focus. The first is our lacklustre export performance with the high-growth BRIC economies – Brazil, Russia, India and China. The second, looking ahead, is our sensitivity to a growth slowdown in China, a concern obscured by problems nearer to home in the Eurozone.
China, now being watched with some apprehension, released figures last week showing annual GDP growth in the first quarter of 2012 slowing to 8.1 per cent. This might seem a growth performance to die for when compared to our own glacial pace – only narrowly above a recession reading. But it marks the continuance of a two-year slowing trend following the post-crisis rebound. The figures turned out rather better than some had feared, particularly in the light of worrying signs in recent months that China may now be experiencing the bursting of its own property and construction bubble – and on a scale and intensity greater than anything we have experienced.
Time will tell. For the moment, despite heartening performances by some companies in recent months, the UK is seeing little sign whatever of a rebalancing of the economy towards manufacturing exports. With the manufacturing sector overall accounting for less than 13 per cent of UK output, many would argue that the decline has gone too far and that hopes for a rebound are pie in the sky: the UK can no longer compete in volume terms with Far East producers. While we may be able to succeed in specialist niche areas and also in design and distribution, it would be a heroic achievement to lift the manufacturing sector as a whole by more than one or two percentage points.
This would suggest that it is still the domestic economy that will have to do the heavy lifting. But despite successive bouts of monetary easing the economy is recovering only slowly. Economists at Barclays Capital have just lowered their growth forecast for 2012 from 0.9 per cent to 0.7 per cent. It is now looking more likely that, without clear signs of a convincing spring upturn, the Bank of England may be obliged to resort to more quantitative easing in the summer.
A faltering recovery, poor export performance, rising unemployment, slow growth ahead: such were the conditions that in previous eras paved the way for currency devaluation. But that, the economist and entrepreneur John Mills argues in a paper just out from the Civitas think-tank, is exactly what we most need now. Even though the pound has fallen since 2008, the exchange rate, he argues, is still preventing exporters from pricing their goods and services competitively in world markets.
Over concentration on the needs of the City of London and inflation have contributed to the decline of manufacturing, stagnant incomes for many, entrenched regional unemployment and rising inequality.
It is a familiar refrain and from a source well practised in performing it. What lends force to what might otherwise be dismissed as an old-fashioned view from just another economist is his ability to draw on his own business experience to illustrate where problems are to be found. “My own experience”, he writes, “has been mainly in generally available manufacturing techniques such as injection moulding, fabrication, metal pressing and assembly. Without intellectual property protection, all this type of industry is highly vulnerable to lower cost base competition – which is exactly what has happened in the UK”.
His argument is that UK manufacturing has become less competitive whilst entrepreneurial rivals in the Far East have aggressively undervalued their currencies to keep their economies growing.
He estimates that a 10-15 per cent devaluation would be sufficient to close Britain’s trade deficit and that a 20-25 per cent devaluation would return the UK to four per cent annual growth.
But there are also powerful caveats to bear in mind. First, the UK current account overall is not as bad as the trade in goods and services suggests because of the income we derive from an ever expanding universe of direct and portfolio investment overseas. In 2010 the UK enjoyed a net positive balance on investment income of £23.4bn. And it is on income and profit from investment in high growth economies overseas that pension funds now rely.
Note also that monetary easing carries a latent inflationary sting – “assisted suicide programmes for national currencies” is how Edinburgh fund manager Robin Angus vividly described it.
Indeed, producer price inflation is already running too high for comfort and there is growing doubt that inflation will fall to the target level of 2 per cent as the Bank of England predicts.
Devaluation may already be built into the system without requiring an outright policy push. “Rebalancing”, even if achievable, is set to be a long-haul game.