May 9, 2011 6:17 pm

All eyes on exporters for a boost to economy

As the UK economy recovers from its deepest recession since the 1930s and government spending cuts begin to bite, the exporting industries are now being relied upon to deliver their most sustained boost to economic growth in at least 60 years.

The independent Office for Budget Responsibility predicts that net trade will add 0.7 per cent to gross domestic product growth this year, rising to 1 per cent in 2012 and between 0.5 and 0.7 per cent a year from 2013 to 2015. Not since records began in the 1950s will trade have offered such a boost to growth.

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IN State of the UK Economy

Put another way, out of the 13.5 per cent expansion predicted in the economy over the next five years, more than 3 per cent is forecast to be due to exports growing more quickly than imports.

“This sustained net trade improvement is crucial to the OBR’s forecast that the UK can achieve reasonable growth despite fiscal austerity,” says Michael Saunders, economist at Citigroup.

But whether it will be possible to meet these goals remains uncertain. For a start, the trend in the years before the recent recession was not favourable. The UK’s trade deficit worsened in eight of the 10 years prior to 2007, the longest such run for more than 60 years, although this also reflects fluctuating exchange rates.

Despite sterling being about 25 per cent weaker against other currencies than it was before the financial crisis, net trade has continued to act as a drag on growth in some recent quarters. Although the first quarter of this year looks healthy, the failure of the weak pound to deliver greater rebalancing towards external demand has, thus far, been a source of confusion and concern.

In a recent survey of exporters by UK Trade & Investment, less than a third saw the fall in the value of the pound as being good for their businesses – in part because many exporters also rely on imports. That said, the economy is emerging from the recession in better shape than some would have predicted. First-quarter export volumes are expected to be about 22 per cent above their level at the end of the recession, beating the gains made after the 1970s recession, and those following the recessions in the 1980s and 1990s.

Mervyn King, governor of the Bank of England, is optimistic. “The big picture that we’re seeing is that the fall in the nominal effect of the exchange rate has not been frittered away. It is leading to a significant increase in exports – it’s underpinning the pretty rapid rise in manufacturing output,” he said recently.

In his view, trade has been a drag on growth because imports have been bouncing back from a collapse during the recession.

And although exports have not picked up as much as some might have hoped, there is an argument that this is because exporters have opted for higher margins rather than growing market share. The opportunity to share in the higher profits on offer will thus lead to more companies opting to export.

Not everyone agrees. JPMorgan, the investment bank, estimates that sterling’s decline since the middle of 2007 has had little effect on trade. Meanwhile, research from the European Commission shows that demand is more important than price competitiveness in determining export growth.

One risk to the UK is that demand in the eurozone economies remains weak or deteriorates further. This could pose a serious concern as the eurozone accounts for about half of UK exports.

There is also a marked difference in the performance in different sectors. Although exports of goods have been doing well, exports of services have struggled since the recession – a major problem, as the UK is the world’s second-largest services exporter, with nearly 40 per cent of its exports in this sector.

It was also one of the few developed countries to expand its exports of services in the past 15 years, partly due to the boom in financial services. Exports of financial services grew by 347 per cent between 1998 and 2008. However, now that finance is set for a tougher time, services exports in the UK may struggle.

Indeed, banks and tanks account for a large proportion of UK exports. Advanced engineering – which includes areas such as arms manufacturing – and financial services are the UK’s two largest export sectors, according to the Department for Business, Innovation and Skills.

Another high-ranking export industry is educational services – universities used by foreign students – although this could be threatened by government plans to clamp down on immigration through universities.

Assuming the economic recovery pans out more or less as the Bank and the OBR predict, demand from overseas is likely to play a big role.

Europe and North America will still form the core of UK export markets – they make up about three-quarters of all exports. But emerging economies will play an increasing role – according to BIS, these markets will grow up to seven times faster than developed markets in the next five years, offering ever-greater opportunities for UK exporters.

There is, however, much ground to make up. The UK currently exports less to the fast-growing Bric nations – Brazil, Russia, India and China – than it does to stricken Ireland.

And although the contribution of the Bric economies (with the exception of Russia) is relatively small, it is growing quickly. The Bric countries make up 5 per cent of UK exports, but they have contributed 11 per cent of export growth since the trough in exports in mid-2009.

BIS argues that growing middle classes in developing economies will mean more demand for recreation, medical spending, education and luxury goods. As a knowledge-intensive economy more focused on producing high-quality, expensive goods and services, the UK should be in a good position to benefit.

David Cameron, the prime minister, has made a point of saying he wants the UK to be “open for business”, vowing to use the Foreign Office to promote British exporters abroad. George Osborne, the chancellor, echoed this sentiment recently by saying that he wanted the country to “start making things again”. The UK economy and its taxpayers will be hoping these wishes come true this time around.

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