The UK’s trade performance since the vote to leave the EU has been even worse than we pessimists expected.
Shortly before the referendum in 2016, I wrote that “a fall in sterling would not do much to close the trade deficit”. This, I said, is partly because exporters and importers respond to exchange-rate changes by adjusting profit margins rather than prices, partly because trade volumes aren’t very price-sensitive, and partly because supply chains are globalised so that higher exports require higher imports.
Since then, however, not only has the trade deficit not closed, it has actually widened despite sterling’s 10 per cent fall since the referendum. Official figures next Tuesday are likely to show that the deficit on goods trade in the past three months exceeded £36bn, around 7 per cent of GDP. That’s close to a record high, and more than anything we saw before the EU referendum.
This isn’t because sterling’s fall raised import prices. Since June 2016 the volume of non-oil exports has grown at only half the rate of imports.
Nor is it because of weak demand overseas. In fact, the eurozone grew more strongly last year than many economists expected. That should have boosted exports.
So why didn’t it?
A big reason, I suspect, is uncertainty. Exports don’t increase by magic in response to a cheaper pound or stronger overseas demand. To export more, companies must invest in overseas sales and marketing efforts, and perhaps in new equipment. They’ll not do this, however, if they are uncertain about future trading arrangements – about whether there’ll be tariff barriers (or more importantly non-tariff barriers such as red tape) to future exports. The fear of a bad Brexit, then, has stopped companies taking advantage of the lower pound.
It’s well-known that uncertainty suppresses business investment. It can also depress exports, for similar reasons.
An additional factor might be a lack of investment and innovation. UK labour productivity has flatlined for the past 10 years. This hasn’t much hurt price competitiveness, because wages have also stayed low. But it might well be an indicator of poor non-price competitiveness. A lack of productivity betokens a lack of innovation and entrepreneurship. That must hold back exports.
Of course, it’s possible that when uncertainty about Brexit is resolved, companies might catch up with investment plans that they’ve current put on ice. Even if this happens, however, it won’t be for some months. And it might not happen at all: Boris Johnson’s notorious recent remark suggests that the interests of exporters are not uppermost in the government’s mind.
Worse still, overseas demand is now faltering; next week’s figures are likely to show that industrial production in the euro area has fallen since the winter. That’s bad for UK exports.
All this might just about be tolerable if other sectors of the economy were growing well. But they are not. The almost daily slew of bad news from the high street warns us that domestic demand is struggling as much as exports. Which suggests that we are set for months more of weak growth.
