The improvement in trade: Falling imports, not rising exports
The release of last week’s GDP data provides as good a time as any to ask an important question, what’s happening to the government’s hopes of ‘export-led growth’?
Moving towards exports being a more important driver of growth has been a goal of government policy since the formation of the Coalition. It is a crucial part of the much heralded strategy of ‘rebalancing’ towards ‘investment & exports’.
The outlook for business investment, according to the OBR itself, is much less rosy than was once assumed. As I’ve noted before, the forecasts of rapid growth in private business investment keep being pushed back:
But what of exports?
The graph below (all from the Q2 GDP data series) shows net trade 9exports minus imports) as a percentage of GDP quarterly since 1997.
As can be seen the UK’s net trade position detieriated throughout the pre-crash boom and then sharply improved in the recession.
After peaking at -3.5% of GDP in Q3 2007, it had improved to -0.8% by Q1 2011, worryingly for the government the net trade has marginally worsened since then.
Indeed in the past four quarters the trade position seems to have stabilised around -1.2% of GDP (-1.2%, 1.3%, -1.1%, -1.2%). Stabilisation is obviously better than the pre-recession trend, but as the government is hoping this will be a driver of growth, it is clearly not good enough.
At the end of 2010 the trade balance was -1.8% of GDP whilst by the end of 2011 it was just -1.1%. In other words net trade added substantially to growth last year – indeed, the domestic economy actually contracted. But crucially, the improvement in net trade came almost entirely in the first quarter of that year.
But perhaps the most interesting trend in the data is one rarely commented on. Fundamentally the improvement in the net trade position has been driven not by a surge in exports but by a drop in imports.
The graph below rebases both imports and exports to 100 in Q2 2008 and shows the trends over the past 4 years.
As can be seen exports plunged in 2009 as global trade collapsed, then recovered sharply throughout 2010 and have been relatively stable since early 2011. But despite the major improvement in the UK’s net trade position since 2008, exports are only a 0.3% above their Q2 2008 level.
By contrast, imports also plunged in 2009 but have failed to return to pre-recession levels. In fact imports are currently still over 5% below their level of mid 2008.
In other words there are currently two key facts to know about the UK’s trade performance over the last few years – first the net trade position has improved substantially since 2008, but has been stagnating for a year now. Secondly the largest driver of this improvement has not been improved exports but reduced imports.
With business investment weak, consumption held back by falling real wages and the government committed to austerity, net trade will have to play an important role if the UK economy is to grow. It remains to be seen if further improvement is possible.