In the past, a 25% depreciation in sterling would have been sufficient to boost exports, limit imports and turn the trade figures around – not this time
Britain runs two big deficits – a budget deficit and a trade deficit. Much is said about the former, too little attention paid to the latter.
It is clearly a worry for the chancellor that it is taking longer than expected to bring down the level of government borrowing, but the trends in the current account are more worrying. In the past, a 25% depreciation in sterling, of the sort seen in the first 18 months of the financial crisis, would have been sufficient to boost exports, limit imports and turn the trade figures around. Not this time. The current account deficit in 2012 was higher than it was in 2007.
Britain’s poor record in exporting to the fast-growing economies of the developing world is said to be the reason for this weak performance. That’s wrong, according to Simon Tilford, chief economist at the Centre for European Reform thinktank. He says exports to non-EU markets have been growing fast, up 65% for goods and 35% for services between 2006 and 2012. It is trade with the EU that has been the problem, with exports of goods falling by 5% and services exports rising by 23% over the same six-year period. Britain runs a current account deficit of 4.5% with the EU and a surplus with the rest of the world.
The outlook for exports to the UK is not going to change any time soon and if the government is banking on the EU to help rebalance the economy it needs to think again. Britain’s economy will remain flat as a pancake unless action is taken to stimulate domestic demand. That would, of course, mean that the trade deficit would widen but that in turn would lead to a cheaper pound and further boost exports to non-EU countries.