Exporters in the UK should have had a boost to their competitiveness from sterling’s sharp depreciation after the global financial crisis. The pound’s value fell by more than 25 per cent against a basket of currencies of the UK’s major trading partners between mid-2007 to end-2008 – a larger depreciation even than when sterling was forced off the Exchange Rate Mechanism in 1992.
The hope was that exports would drive a recovery. But the country’s 2012 current account deficit was the largest on record and net trade subtracted from GDP growth.
Services exports have barely grown in five years. Financial services exports – a relatively large share of UK services exports – suffered a particularly significant negative demand shock from which they have yet to recover fully.
Rebalancing the UK economy will not be quick or easy as there are also structural issues holding back UK exporters
In part this reflects cyclical factors, such as the collapse in demand during the 2007-2008 recession, especially from the euro area, still the UK’s largest trading partner. Compared to many other major economies, the UK also exports relatively little to faster-growing emerging markets.
But trade deficits are hardly new: the UK has not run a trade surplus since 1997. This gap between exports and imports must be paid for by borrowing from abroad. Large deficits therefore cannot be sustained indefinitely. The UK can and must do better on exports, and that would require both internal rebalancing to raise productivity, and external rebalancing by exporting to faster-growing markets.
However, rebalancing the UK economy will not be quick or easy as there are also structural issues holding back UK exporters.
These are shortages of spare manufacturing capacity that limit the ability of firms to meet demand, lack of skilled labour able to switch from lagging sectors to more successful ones, and tight credit conditions – especially to smaller and more credit-constrained exporters.
Addressing those bottlenecks will take time, but policies could include infrastructure investment, better training and education, plus careful monitoring and easing of credit conditions to small and medium enterprises.
If the UK can improve domestic productivity growth, then there is hope. UK trade data improved during 2013 and the return to growth in the euro area is further reason to be relatively more optimistic. The UK also has some highly competitive manufacturing industries, such as cars and pharmaceuticals, and is still the world’s second largest exporter of services.
Finally, trade is dynamic, not static, and the UK is not the only country that needs to rebalance. As emerging-market economies develop and grow richer, they are likely to rebalance towards greater consumption of goods and services in which the UK is stronger. UK exporters are potentially well positioned.
This research was first published on 22 August 2013.