The answer is – yes, but not much. This is not because the UK economy is not exposed to overseas economies, but rather because it is too well integrated into the global economy.
Increasingly, production is globalized. This means that a UK firm wanting to increase its exports will have to import more parts and raw materials. And this in turn means that any boost to GDP from higher exports is mitigated by rising imports.
For example, since the start of 2000 the correlation between annual growth of export volumes and import volumes has been 0.91, implying that the two move almost in lockstep with each other. Each percentage point move in exports has been associated, on average, with a 0.86 percentage point move in imports.
In light of this, it’s rare for net trade to make a big contribution to GDP, either upwards or downwards. Figures from the OECD show that since 2000 the average contribution to annual GDP growth from net trade (regardless of sign) has been 0.65 percentage points. That’s only a quarter of the average annual change in overall GDP. The UK is not unusual in this. In France, the average annual contribution to GDP growth from net trade has been 0.36 percentage points, in Japan 0.85 percentage points, and in the US 0.52 percentage points.
What’s more, because exporting tends to be a high value-added activity, it is a creator of great jobs rather than a great job creator. Since 2000, each annual percentage point change in export volumes has been associated, on average, with a change in employment of just 0.06 percentage points. This tells us that we cannot rely upon net trade to reduce unemployment very much.
Of course, none of this is to claim that growth in overseas economies is a bad thing. It’s certainly not. For one thing, it doesn’t just boost GDP growth by raising exports. It can also do so by improving business confidence which in turn causes investment to grow – though there’s little sign of this happening yet. And since the mid-90s at least, global growth has been well correlated with equity returns, because a stronger global economy tends to increase investors’ appetite for risk.
Instead, this means we cannot look to overseas economies to greatly improve our economic prospects. Growth must be domestically generated.
This prompts the question. The UK has run a current account deficit every year since 1985 – which means it has been a net borrower from overseas every year. If exports and imports are so closely correlated, how can this ever change? The answer’s simple. A current account deficit means – by definition – that domestic investment exceeds domestic savings. We can only run a current account surplus, therefore, if this reverses and if savings rise relative to investment. Right now, though, this is exactly what we don’t want, as it would almost certainly mean even weaker domestic demand.
