Today I have woken up to a story that I commented on a few weeks ago concerning the UK’s strategy to promote exports as a new source of growth. This policy forwarded by the chancellor has aimed to restructure the economy away from consumer spending and banking towards export led growth in the manufacturing sector. However as to date the policy has far from delivered the expected results. Instead some of you may have spotted a headline today on the guardian website that the gap between the UK’s current account deficit (the gap between exports and imports) is now at its worst level since 1989. Now the UK has traditionally helped alleviate such deficits through its net investment income, however the picture here looks no better. Financial service exports, such as loans which bring income into the UK, have fallen considerably from £52 billion to £44 billion last year. Furthermore the UK’s net international investment position (stock of foreign assets owned by UK residents minus UK assets owned by foreigners) is now becoming progressively worse.
As commented earlier in this blog the strategy has not succeeded because to sell goods abroad there needs to be sufficient demand, no matter how far the pound has devalued. The crisis in the euro-zone, one of our biggest trading partners, has meant this demand for British goods is low. In addition to this as explained in Larry Elliott’s blog, several major recessions since the 1980s have reduced the UK’s manufacturing base meaning that the sector has been unable to capitalize on the demand that has been generated by the falling value of the currency.
On the other hand the falling value of the pound has meant increased prices of many imported goods for British consumers, in a time when wages have stagnated and unemployment is high. Furthermore such a policy is considered by some to be unsustainable in the long run. Jeremy Warner of the telegraph argues that continued devaluations may lead to investors losing confidence in UK assets which could perpetuate another financial crisis.
On this same day another announcement has taken place which could further hinder the UK’s recovery in the short term. The Bank of England has told banks that they must hold an extra £25 billion in extra capital to protect against potential future losses. Whilst I back this idea as a future long term strategy, this is not what we require in the present environment. As explained by James Barty, at the Policy exchange think tank, bank lending to private firms has decreased by £10 billion in every year since 2008. Imposing a higher level of capital holdings could therefore lead to further decreases in lending to small businesses. Such measures could therefore further hinder a recovery of aggregate demand in the economy.
Such news and confounding policies only seem to be leading to the inevitable, a triple dip recession is on its way. A change of policy is needed and fast. Unfortunately the recent budget failed to deliver on this and even may have made matters worse by creating the potential for another housing bubble. It seems that we have inherited a government committed to a clear and unwavering economic policy when we needed it least. Lets hope hope that this government can learn from the signals before its too late.