Revision: Slump in Global Trade and UK Economy

An important area for students to understand are the ways in which global economic forces affect the domestic economy. Both the new AS and the legacy A2 syllabus for AQA expect students to be aware of the nature of and possible consequences of external demand and supply-side shocks. This chart from the Bank of England Inflation Report (May 2009) highlights just such a demand-shock - the collapse in world trade and the global recession.

Nearly every OECD economy is experiencing a fall in the volume of exports of goods in 2009 and with the slump in merchandise trade comes a drop in industrial production. Plant closures, moves towards short-time working, a steep reduction in stocks (inventories) and the slashing of capital investment projects are all hallmarks of this period of reverse globalisation in physical products.

Countries whose manufacturing sector continues to make a relatively high contribution to national output (value added) are in the firing line. Japan, Finland, South Korea and Germany (the world’s biggest exporter of manufactured goods) are all suffering from an annual drop in real exports of ten per cent of more. This is a major demand shock to their economies. Students should consider in the revision the negative multiplier and accelerator effects of this going forward.

Britain’s manufacturing industry accounts for around 13-14 per cent of GDP but the sector exports close to 60 per cent of it’s output. Little wonder that the UK industrial sector is suffering a deep recession as is the construction industry that together forms our industrial base.

There are some signs of hope - for the UK the 25 per cent depreciation of sterling offers the hope of an export-led recovery once global trade starts to rebound. That is assuming that our manufacturing base survives sufficiently in tact to reap the benefit of kinder economic headwinds and a competitive currency?