Fly in the ointment for export-led growth

David Smith’s weekly Economic Outlook in the Sunday Times focuses on the prospect that recovery from the recession will come from exports. He suggests that the conditions needed are in place – sterling is a significantly more competitive currency than was the case 18 months ago, there is strong recovery in world trade which is likely to last into 2011, and there is no wage inflation to spoil the competitiveness of UK export prices. The Ernst and Young Item club’s predictions for the economy over the next ten years, to be published today but much trailed through the media this weekend, will suggest that although the domestic economy will struggle to produce enough consumer demand to stimulate growth - debt-laden consumers have to recover from the shock of repaying some of their borrowing before they are prepared to spend so heavily again – growth in exports will be strong, with figures of 9%, 9.5% and 8% growth predicted for 2011 to 2014. If consumption is indeed sluggish at the same time, we can hope that imports will not be growing as fast, so that the figure for net exports improves, allowing Aggregate Demand to grow and some recovery of output to become established.

Smith goes on to consider what these exports will be. As manufacturing has suffered 14% contraction from its pre-recession level in 2007, there is plenty of spare capacity but it won’t be possible to simply re-open factories that have closed down, and the weakness of sterling didn’t stop the closure of the Bosch factory last week – that is down to comparative advantage moving away from the UK and towards the lower cost economies elsewhere. However we retain significant strength in the services sector; not only financial services but also the wider areas of law, creative and media industries, healthcare and biotechnology, where we should be looking to exploit the new comparative advantage.

What David Smith does not go on to consider is where exactly the demand for those important exports is going to come from, but the adjacent article in the Sunday Times, Irwin Stelzer’s weekly ‘American Account’, puts a big fly in the ointment. The headline ‘Obama won’t let free trade cut American jobs’ raises some caution. Not only the UK but also China are relying on export growth to provide the solution to their domestic economic problems (in China’s case to avoid the risk of an asset-price bubble resulting from over-stimulation of domestic demand). So too are several of the Eurozone economies, so the first requirement must be to ensure that we are not trying to export the same goods as those other countries, in order to avoid excess supply of the same goods onto the world market, which cannot help the prices at which they can be sold. The US is the world’s largest consumer and the UK’s biggest single market for exports, and many countries will be relying on the US as the source of demand for their exports. The US trade deficit rose by 9.6% in November indicating that there was a recovery in demand there following a fall of 15% at the start of 2009, but will the politics of the US allow those imports to the US to continue, when 17.3% of all workers there are looking for jobs or too discouraged to do so, and the average period of unemployment is growing? Stelzer’s suggestion is that countries relying on export led growth to create jobs in their own countries are counting on exporting not only goods and services but also unemployment to the US, and the US may not stand for that. With the example already of protectionist measures including levies on imported steel, favourable financing for domestic car manufacturers and refusal to press for new trade agreements, the signs from the US are not good.