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We built the world,” it says in faded white paint on a brick wall. “Every metropolis came from Ironopolis.” So reads a tribute to the mighty legacy of iron in Middlesbrough, an industrial town near Britain’s east coast. The iron boom in the 19th century helped lay the ground for Middlesbrough to develop other thriving industries, from steel to shipbuilding to chemicals. But then came decades of economic decline, capped by the global recession that hit five years ago. Now there are more job cuts at the chemicals site up the road – a metal city of towers and twisting chimneys that was once home to Imperial Chemical Industries, a former British manufacturing behemoth. Of the 27 adverts in the windows of the local college “job shop”, two are for industrial roles. Twenty-two are for low-wage work in hospitality, cleaning, catering, retail, office administration and beauty.

It was not supposed to be this way. Any economics textbook will tell you: places such as Middlesbrough should be savouring a moment when conditions are particularly favourable to Britain’s exporters. But the Britain that is emerging from the financial crisis does not look the way it was expected to look. As a result, the relief that has greeted the country’s recent economic recovery has been tempered with unease.

When sterling fell 25 per cent against a basket of currencies during the financial crisis, economists thought they knew what to expect. Britain’s trade deficit would expand briefly as import prices rose, but then shrivel as the country sold more newly cheap exports and swapped newly expensive imports for things made at home. Neglected manufacturing regions would stir into life as the economy “rebalanced” away from debt-fuelled consumer spending. Countries in the eurozone, hamstrung by a single currency that had not fallen as much, would look on in envy.

Not only was this standard economic theory, but it had also happened before. When sterling fell 15 per cent by the same measure in the early 1990s, the trade deficit turned to surplus and British exporters gained market share for five successive years. So in June 2010 the Office for Budget Responsibility, the country’s official forecaster, predicted another trade boom. “We were looking for the 1990s to happen,” says Geoffrey Dicks, one of the three economists in charge of the OBR at the time. “We thought exports would respond in the way they had in the past.” George Osborne, the finance minister, put “rebalancing” at the centre of his economic strategy. “We want the words ‘Made in Britain, Created in Britain, Designed in Britain, Invented in Britain’ to drive our nation forward,” he declared in his 2011 Budget speech. “A Britain carried aloft by the march of the makers.”

He was to be disappointed. Exports did not increase as much as expected and Britons kept buying imports, even though they went up in price. In 2010, the OBR thought net trade would contribute 0.9 percentage points to economic growth in 2012. In fact, it subtracted 0.6 percentage points last year, and the OBR now forecasts it to contribute just 0.1 percentage points a year until 2017. As Middlesbrough can testify, even commoditised, price-sensitive goods such as bulk chemicals do not seem to have had a boost. Britain’s annual trade surplus in chemicals, which was between £1bn and £4bn a year before the crisis, was just £169m last year.

What went wrong for Britain? The question matters for the eurozone too, since it challenges the assumption that ailing member countries could trade their way back to health if only they had their own (cheaper) currencies. Spain’s exports grew an average 7.3 per cent a year between 2010 and 2012, albeit after a sharp fall. Britain managed just 3.5 per cent.

Ask an economist or a business owner why sterling’s depreciation did not boost net exports and you will generally get one of three answers: “bad luck”, “bad preparation” or “bad question”.

Britain’s bad luck is not hard to identify. As Danny Gabay from Fathom, an economic consultancy, says: “It doesn’t matter what the price is, it’s going to be hard to sell things when your main customer’s shut up shop.”

About half of Britain’s exports go to other EU countries, many of which have been hit hard by recession and sovereign debt crises. It was falling demand in Europe that prompted Saudi Basic Industries Corporation, which runs a “cracker” at the Wilton chemicals plant near Middlesbrough, to announce 100 job cuts there in April. Exports to China and South Korea have trebled since 2007, but the growth comes from a low base.

Britain has been unlucky in another way too: one of its most successful exports just went out of fashion. The financial services sector ran a trade surplus of £41bn in 2008, accounting for about two-thirds of Britain’s overall surplus in services. Since then, financial services exports have dropped 16 per cent. “Global demand for the services that we excel in, namely banking, evaporated even though we were willing to provide this product at a heavy discount after the depreciation,” says Amit Kara, an economist at UBS.

The country’s third big misfortune was for the North Sea to run dry at the precisely the wrong moment. Britain’s oil and gas production, already in long-term decline, plunged 40 per cent in volume terms between 2008 and 2012 thanks to technical problems on North Sea rigs. That has had a direct impact on the trade deficit and forced energy-hungry manufacturers to rely more on (sometimes unreliable) imports. In March, Britain came within six hours of running out of natural gas. Meanwhile, the US shale revolution has been a boon to competitors across the Atlantic.

Britain might have been unlucky, but it was also badly prepared in 2007 for the opportunity about to come its way. It had spent a decade enjoying its own private party, fuelled by construction, public sector services and banking. Andy Haldane, executive director for financial stability at the Bank of England, has likened the financial sector in those years to a vacuum cleaner. “There was a great sucking sound as both people and monies were drawn into banking,” he said in a speech last year. “Industries outside of finance were starved of sunlight.”

Manufacturing’s share of the economy fell from almost a fifth in 2000 to about a 10th in 2010. Business investment fell to the second-lowest position among advanced countries.

The chemicals plants near Middlesbrough were sold piecemeal to an array of companies after ICI’s disintegration over the past decade. “The key decision makers are based in Riyadh or Singapore or America,” sighs Bob Bolam, the local Unite union representative for the industry, as he nurses a mug of tea in his office. “We’re just a satellite now, a little town marked on a map.”

In 2009, US-based Dow Chemical announced it would close its ethylene oxide plant at the Wilton site, the only place in the country that made the stuff. As a result, Croda International, its downstream customer, had to close its own plant and move it to continental Europe. “In the old days, ICI would have looked at the economics of everything downstream, which they also owned, and said we’ll continue to run [the ethylene oxide plant] at a loss,” says Mike Clements, who used to work at Wilton for ICI and is now at PwC, the accountancy firm. “Now it’s owned by 10, 15 businesses, each of whom clearly can only worry about their own profitability.”

Paul Hodges, a former ICI executive who runs his own consultancy, says the sector’s fragmentation helps to explain why it failed to capitalise on sterling’s fall. “To put it bluntly, nobody in the UK chemical industry got together in early 2009 and said, look, we’ve got this windfall, what are we going to do . . . From a cartel point of view they probably couldn’t do that. But BASF [the German chemicals conglomerate] can; it can go out therefore and capture markets.”

He thinks Britain’s corporate culture helps explain why some exporters used the cheaper currency to expand profits instead of market share. “You’ve got an attitude that says ‘the status quo is fine and I want to maximise profits in the short term’.”

The gloom should not be overstated. Britain is also home to many successful exporters, most notably in the cars, aerospace, pharmaceutical and defence sectors. Britain’s trade surplus in services has also expanded since the crisis, in spite of the drag from the financial sector. But ask a prospering company if cheaper sterling has helped, and it will probably tell you it is an irrelevant question.

Many exporters point out that they are also importers of raw materials, components and services, which blunts the impact of sterling’s depreciation. But more importantly, as companies move away from commoditised exports and towards specialised, innovative products and services, the selling price becomes a less important driver of demand. Andrew Sentance, senior economic adviser to PwC, discovered this in 2010 when he was a member of the BoE’s Monetary Policy Committee. “As I went round seeing manufacturing companies, it was clear their success was driven by their technology, skills and quality, not by the value of the pound,” he says.

Take Croda International, which makes the speciality ingredients that reduce our wrinkles and plump up our lips, among other things. Four of its 17 factories are in Britain and it has just spent £12m on a new UK plant to make shampoo and conditioner ingredients. But Steve Foots, the chief executive, says sterling’s value “doesn’t change our decision-making at all”.

“It’s all about innovation at Croda,” he says. “We could have put that [plant] anywhere in the world but we decided it would be best in the UK. It’s new technology for Croda; we wanted to build it where we have a good skills base.”

The lesson from Britain’s attempt to “rebalance” since the financial crisis is that it takes much more than a currency depreciation to reshape an economy. It takes growing markets, a coherent energy policy, skilled workers and innovative, ambitious companies. It also takes time.

Some economists worry Britain’s government has run out of patience, however. While exports have picked up a little recently, consumer spending and the housing market are propelling the economic recovery. The government has boosted housing with its “Help to Buy” policy, a combination of equity loans and mortgage guarantees.

Mr Gabay from Fathom says “Help to Buy” should really be called “Help to Buy an Election”.

“In our view they’ve said: ‘Do you know what, this rebalancing stuff, it’s hard, isn’t it? There’s no votes in this. Sod it, let’s just go back to what we do best, debt-fuelled consumer spending based on houses, we’re excellent at that.’ But the rest of the world is not convinced any more.”

Spain: From bags to blood, exports fuel recovery

Spain may finally be emerging from a brutal two-year recession but few are in the mood to celebrate, writes Tobias Buck in Madrid. Unemployment remains sky-high, public deficits are soaring and the nation’s banks are still scrambling to shore up their balance sheets.

The one undisputed bright spot – and the single most important reason why Spain is expected to return to growth this year – is the export industry. From handbags to blood plasma products, Spanish goods and services have proved a remarkable success in world markets.

In the first five months of this year, exports rose more than 7 per cent compared with the same period last year, to €98bn. They now account for almost 35 per cent of Spain’s gross domestic product, a far higher share than in France or Britain. Shipments to emerging economies have risen particularly fast, with sales to Brazil increasing more than 50 per cent in the first five months of the year.

According to European Commission projections, Spanish export growth will be the highest in the EU this year – rising more rapidly even than shipments from Germany. The new-found exporting prowess allowed Spain to make a historic breakthrough in March, when it recorded its first monthly trade surplus in more than four decades.

Analysts say the recent rise in Spanish shipments of goods and services is closely linked to the economic downturn. Most importantly, wages and unit labour costs have fallen sharply as a result of the crisis and the rise in unemployment. A sweeping labour market reform agreed last year has made it easier for companies to cut jobs and depart from collective wage deals. This means the country’s private sector can produce more cheaply – and more flexibly – than competitors, especially inside the eurozone.

But the crisis has also forced business leaders to undergo something of a mental shift. During the boom years, local demand was so high that many businesses had little incentive to look beyond the country’s borders. Now, the only way for Spanish companies to survive and thrive is to venture abroad.

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