A year ago, there appeared to be a decent chance the UK would enjoy an export-led recovery. Export volumes, excluding oil and erratic items, were up 18% on a year earlier, boosting growth in manufacturing. RealGDPwas increasing strongly.
Now the picture is far less positive.
The latest figures on trade, released by the Office for National Statistics, show export volumes increased just 3.7% over the last year, and were down 2.8% comparing the latest three months with the previous three.
Import growth was 3.6% over the last year – just about matching export growth – and 1.1% over the latest three months. The export boost to growth has faded away.
Export growth is currently running at 3.7% per year and import growth at 3.6%. This compares to the OBR forecasts for the full year of 7.9% and 5.0%.
Whilst export growth is no where near as strong as predicted by the OBR, import growth is also weaker than it anticipated. The end result is that the trade balance is actually in better shape than the OBR forecast back in March. Back then it expected the Q1 trade balance to come in at -£13.1bn and Q2 at -£13.7bn.
The actual outturn (-£8.5bn & -£11.3bn) is therefore better than anticipated. That’s the good news.
The bad news is that this isn’t being driven by better-than-expected exports but by lower-than-expected imports and the reason we are importing less is because domestic demand has collapsed.
This is why the consensus view of the independent economic forecasters surveyed monthly by the Treasury is that the economy will now growth by only 1.2% in 2011. And the entirety of that growth will come from net trade. Domestic demand is expected to contribute zero per cent to GDP growth.
So the better performance in net trade is actually driven by domestic weakness and isn’t enough to offset the fall off in domestic demand. I’m not sure this is how George Osborne saw ‘rebalancing’ panning out.
Paul Mason has an excellent post up on the notion of a German Marshall Plan for the European periphery. Whilst such a plan sounds good, I have my doubts about whether it will actually happen.
Towards the end of his post Paul writes:
Keynes comes in for a lot of stick these days but his greatest achievement was not to design the rescue of 1930s capitalism through state intervention: it was two-fold.
It was to say:
(i) in 1919 don’t punish Germany and push it into a downward economic spiral that will cause social chaos; and
(ii) in 1941: hey, fellas, what’s the world going to look like when we win? Here’s an idea…
This parallel between the Europe of 1919 and the one of today is an interesting one.
To see what Keynes would have to say, I went to his short essay of 1919 ‘Proposals for the Reconstruction of Europe’.
Keynes begins by noting that the notion of cross border financial payments really only dates to the mid century on any large scale.
“the system [of international payments between nations] is fragile; and it has only survived because its burden on the paying countries has not so far been oppressive’.
After the Great War these payments became larger with both reparations and inter-allied loans. Keynes doubted this could continue:
‘I do not believe that any of these tributes will continue to be paid, at the best, for more than a very few years. They do not square with human nature or agree with the spirit of the age’
Keynes goes on to suggest a solution to this problem, based around inter-allied debt forgiveness, treaty modification and the establishment of a proto-IMF from which nations could borrow administered by the League of Nations.
Having sketched out a solution though, Keynes then writes:
‘It is useless at the present time to elaborate such schemes in further detail. A great change is necessary in public opinion before the proposals of this chapter can enter the region of practical politics’
With a policy change not coming and with populations unlikely to revolt, Keynes predicted what lay ahead:
‘There may, therefore, be ahead of us a long, silent process of semi-starvation, and a gradual, steady lowering of the standards of life and comfort. The bankruptcy of Europe, if we allow it to proceed, will affect every one in the long-run, but perhaps not in a way that is striking or immediate’.
Unsustainable cross-European transfers? Lack of policy will? A long period of declining living standards ahead? This all feels very familiar.