Belfast Telegraph

Thursday 25 December 2014

Recovery hopes may end up in Icelandic smoke

Almost all nations in the Western world are hoping for an "export-led recovery". With the Eyjafjallajokull volcano belching ash into the heavens, those hopes are diminishing, although not for the usual economic reasons.

After all, most exports have to be transported through one means or another, and air transport has become increasingly important over the years. On top of its importance for freight, air transport is also rather useful for the export of business people and the import of tourists (or, put another way, the export of tourism).

By air, the UK trades heavily with the US and big chunks of Asia, parts of the world where there are now reasonable signs of economic life. Exports between European nations, where air freight matters less, aren't doing terribly well, so connections with the rest of the world are now unusually important. For the UK and for countries in Europe hoping to escape the depths of recession, Mother Nature has struck at a particularly inauspicious moment.

Not being an expert on volcanoes, I have no intention of spending the rest of this column talking about ash plumes and ongoing eruptions. I do, however, want to stick with the export theme. If policymakers in all of the major industrialised nations are hoping to deliver export-led recoveries, they will be very disappointed. Unless we are now trading with Mars, it isn't possible for everyone to pursue this path. Someone, ultimately, has to do the importing.

It's easy enough to see why the export route seems so attractive. Throughout the Western world, nations are still awash with debt. As electorates are now beginning to realise, the costs of the economic crisis have ended up being borne by governments and, hence, by taxpayers. Unless governments choose to default on their creditors - not a policy to be generally recommended unless a nation is intent on becoming a pariah state - they're eventually going to impose austerity measures. Higher taxes and cutbacks in public spending are hardly good news for growth. Something is needed to sweeten the bitter pill. Higher exports are the obvious solution.

Some countries are, at least in theory, more adept at playing the export game than others. Those that have flexible exchange rates should find themselves in a winning position and, within that group, the UK seems to be rather well placed. Sterling's collapse in 2008 was even bigger than the fall which occurred in the aftermath of the UK's ignominious exit from the Exchange Rate Mechanism in 1992.

The associated improvement in UK competitiveness should have left UK exports storming ahead as UK producers grabbed market share from other, less fortunate, nations.

Yet the UK's exporters still seem to be struggling. There are two main reasons. Firstly, British management has an alarming habit of using any decline in sterling to bolster profit margins in the short term instead of delivering a permanent increase in the UK's share of world trade. It's easier to keep foreign prices unchanged and raise the sterling price than to keep the sterling price unchanged and cut the foreign price. The latter requires hard work abroad while the former allows more time at the 19th hole, gin and tonic in hand.

Secondly, the UK exports to the wrong parts of the world. The really big opportunities opening up during the past 30 years have, not surprisingly, been in the emerging world.

China, India, Brazil and others have seen their economies expanding at a rate of knots. Their dynamism has, in turn, created opportunities for entrepreneurial exporters.

Some nations have proved more opportunistic than others. Some have been in the fast lane. Others, the UK included, have not.

In recent years, we have witnessed the emergence not just of newly successful economies but also of new trade links. Businesses in Brazil are increasingly focused not on the opportunities in the US or in Western Europe but, instead, those in Beijing and Bangalore.

For nations to enjoy an export-led recovery, their exporters need to focus on the major sources of demand elsewhere in the world.

No matter how far sterling falls, UK exports are unlikely to do very much if the main market remains just over the English Channel. That's not where the growth is.

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