Where are the exports going to come from? Confusion at the Bank of England

The British economy is severely demand constrained: consumers and businesses are not spending as they rebuild their balance sheets and Government is trying (and failing) to reduce the fiscal deficit. So can we rely on the rest of the world to get us out of the mess by demanding more of our goods and services and generating an export-led recovery? The latest evidence suggests no, as export growth has been low despite a significant devaluation of sterling.

Are we exporting to the wrong markets?
Trade performance is usually explained by an income effect and a relative price effect: simply, our exports are determined by prosperity abroad and the price competitiveness of our goods. According to the next Governor of the England (Dr Carney) the problem is that we are exporting to the wrong markets. In his  evidence to the House of Commons Treasury Committee, he argued “Currently, British exports are concentrated in slow-growing advanced economies, particularly in Europe, rather than fast-growing emerging markets”. And he produced this chart to support his argument.

carney export data

But as pointed out by  James Mackintosh in the FT, in its latest  inflation report the Bank produced a systematic analysis – which contradicts the new Governor. The inflation report states “the relative weakness of UK exports does not reflect particular weakness in its major trading partners”. The chart in the inflation report shows that growth in the United Kingdom’s major trading partners (weighted by export shares) has been no worse than that of many other countries that have achieved stronger export growth. What has tended to be worse is UK export growth (shown by the blue diamonds in the chart).

Boe 1

Are our exports too expensive?
If the problem is not trying to export to slow growing markets, is it because our goods and services are too expensive? The evidence suggests not. Another chart produce by the Bank shows that on various measures there has been a significant fall in the exchange rate since mid-2007. This has, in the main, led to exports being more price competitive.

Boe 2

What explains the disappointing performance of UK exports?
If our exports are price competitive and we are selling to growing markets, what can explain the dismal performance of UK exports? There are two main possibilities. First, the problem is sectors not trading partners. There is relatively low global demand for the output of UK exporting sectors – such as financial services. Second, the problem is not price competiveness but non-price competitiveness – such as quality, design and speed of service. This is a major policy concern because it takes a long time to generate structural change and improve non-price competiveness. Thus global recovery and further devaluation of sterling may only have a limited impact on UK export growth.

About mk242013

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