In the United Kingdom, the recovery after the financial crisis has still failed to materialise. According to the latest Office for National Statistics evidence, the economy grew by just 0.2% in 2012. Hence, the economy remains around 3% smaller than its previous peak in Q1 2008 and is more like 15% down from where it would have been had the pre-crisis trend in economic growth continued. The question is why?
The Coalition Government and indeed the Bank of England have talked of the need for economic rebalancing; that is, for business investment and, notably, exports to play a stronger role in driving growth as consumers and the government cut back their spending. We argue that the UK’s export market mix has made a surprisingly large contribution to the UK’s failure to emulate Germany in achieving export –led growth.
The Bank of England’s pursuit of aggressively loose monetary policy and markets’ presumed distaste for sterling assets given the weakening growth outlook and worsening government finances saw sterling depreciate by up to 25% in the 2007-8 period. In recent weeks, many have questioned why the UK has been unable to achieve significant export growth on the back of such a large depreciation. Hence, some Bank of England Monetary Policy Committee members have talked of the need to further engineer the mooted economic rebalancing; with three members voting for increased quantitative easing in the February policy-setting meeting. Sterling has fallen early in 2013 as markets bet that further extraordinary monetary policy will be unleashed. But will the UK’s export performance improve after the volume of exports managed to contract 0.3% in 2012 despite (albeit slower) growth in global trade and GDP?
Internationally, world GDP has performed moderately well after falling in 2009 for the first time since 1946. Growth has been in the 2-3% band which has been strong enough to hold up the price of oil and many other commodities and keep upward pressure on the cost of living in the UK. Meanwhile, whilst a devalued pound has boosted inflation, it has done less than had been hoped to boost exports. The graph illustrates why it has been so hard to get UK exports to grow. The figure compares world GDP growth with growth weighted by total UK exports shares in 2011.
Up until 2008, the two series have broadly moved in line with each other . But from 2009 onwards, the Western recession and, more particularly, the near collapse of the Eurozone economy has opened a huge gap. In 2012, we estimate that world GDP growth (weighted at market exchange rates) was 2.5% whereas UK export weighted GDP growth was only 1.4%.
This gap between world growth and the growth in UK export markets is a major reason why it has been so difficult to get the UK to rebalance and grow. World growth is orientated to China and the Far East, whilst UK exports are still heavily orientated towards Europe. Moreover, world growth has held up the price of commodities, raw materials, energy and food which has increased the cost of living and squeezed disposable incomes in the UK. Anaemic growth in UK exports, in spite of a major sterling depreciation, has so far been outweighed by the fall in consumer growth caused by this squeeze in disposable incomes.
We forecast that growth in the UK’s current export markets will continue to fall short of growth across the wider world in 2013. If the UK is to stand a chance of getting close to world growth, UK exporters will have to shift their focus away from Europe and towards healthier fast-growing emerging market economies.