Who will buy our exports?

George Osborne’s first budget has sparked a heated debate about its effect on jobs. The Government and the Office for Budget Responsibility (OBR) believe private sector employment will increase rapidly enough to bring about a significant reduction in unemployment over the next five years, despite the loss of hundreds of thousands of jobs in the public sector.

George Osborne’s first budget has sparked a heated debate about its effect on jobs. The Government and the Office for Budget Responsibility (OBR) believe private sector employment will increase rapidly enough to bring about a significant reduction in unemployment over the next five years, despite the loss of hundreds of thousands of jobs in the public sector.

Others are sceptical and worry that unemployment will remain permanently high, as it did in the 1980s, scarring the lives of those who are unable to find work for long periods of time.

Rapid employment growth in the private sector will require strong output growth and the OBR looks for this from three sources: consumer spending, business investment and net exports.

Consumer spending accounts for almost two-thirds of total demand in the UK economy, so it is almost inevitable that any recovery in output growth will be accompanied by increased consumer spending. But the OBR expects consumer spending to grow less rapidly than real GDP in every year from 2010 to 2015 (because it thinks households will be focused on gradually reducing their debt). It is not, therefore, expected to pull its weight in driving recovery.

Business investment spending slumped during the last few years, which is normal in a recession, and the OBR expects it to boom over the next five years, which would be normal during an economic recovery. However, it is predicting a growth rate of almost 10 per cent a year between 2010 and 2015, at a time when growth in consumer demand is subdued. That could be a stretch – unless some alternative source of demand comes along to justify renewed business optimism.

Which brings us to the most extraordinary element of the OBR’s forecast: it expects net trade (the difference between the UK’s exports and imports) to add 3.5 per cent to output growth in the UK over the next five years – an average of 0.7 per cent a year.

Net trade over this period will, according to the OBR, contribute just over one-quarter of the UK’s growth. This would be unprecedented in the post-war era. There is no five-year period since 1948 when net trade has added so much to UK economic growth.

Why the OBR should be so optimistic about the UK’s ability to export is a mystery. Some commentators point to sterling’s decline in 2008 as one reason, and it is true that sterling’s exchange rate index is currently around 20 per cent lower than its average level between 2000 and 2007.

But this is not so much greater than the 15 per cent decline that sterling experienced in 1992 after it was ejected from the exchange rate mechanism. Following that experience net trade added just 1.6 per cent to UK growth over the next three years, before detracting from growth in every one of the next ten years.

Note also that sterling is now appreciating against the euro, having risen from a low of €1.02 to €1.21 over the last year and a half. This matters because the euro area is by far the most important market for UK exports. And the reason the euro is weakening is important too.

It is because the outlook for growth in the euro area economy is deteriorating as governments in countries such as Greece and Spain implement austerity budgets and other countries, like Germany, also choose to raise taxes and cut government spending. The UK is not going to experience an export boom to the euro area if demand is weak over the next few years.

Of course, that still leaves a large part of the world, including some large and rapidly growing countries like China and India, to which the UK might be able to successfully export but there are a number of reasons for taking a sceptical view of the notion that they will be our salvation.

First, their growth tends to be export-led; second, we are late-comers to these markets – companies from other countries have already established strong trading links with them; and third, we are not relatively strong in the manufacture of the types of good, particularly investment goods, that these countries want to import.

The OBR has stated that its economic projections represent a central case, but its current view on UK net trade looks very optimistic. It follows that its views on growth in the economy and the outlook for employment must be similarly optimistic. So, those who worry about unemployment increasing further and remaining permanently high while the government makes massive cuts in public spending are right to do so.

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15 Responses to “Who will buy our exports?”

  1. Richard Garside

    RT @leftfootfwd: Who will buy our exports? http://bit.ly/ajnscf

  2. Oxford Kevin

    I think we need to invent a new country called Importia which can purchase the rest of the world’s spare exports and as a result we will all be able to export our way out of economically difficulties.

    This kind of demonstrates that the global economic problems are due to too much productive capacity and not enough money in the hands of the workers to purchase everything that can be easily produced.

    Seems like unionized workers demanding and getting better wages should help the economy.


  3. Oxford Kevin

    RT @leftfootfwd: Who will buy our exports? http://bit.ly/ajnscf

  4. winston k moss aka 9xzulug

    it’s not about who will buy our exports(how many british owned companies are there LEFT)who export?we are not a manufacturing nation no more,it should be what about focusing inward 1st,invest in green issues,employ/deploy workforces so that new game plan(mindset)can be achieved.rebuild a new infrastructure to embrace,ie sun/solar,wind/turbine,water/hydro.inward restructuring will also give so many employment opportunities for a sustainable amount of time.and at the same time combat our main worry in CLIMATE CONTROL(s)!!!

  5. winston k moss

    RT @leftfootfwd: Who will buy our exports? http://bit.ly/ajnscf

  6. Mr. Sensible

    I think that these predictions are just fantacy.

    How on Earth is the VAT increase going to help increase spending?

    And how is business investment going to explode when, as is covered in the papers today confidence has crashed?

    This budget is bad for growth, bad for jobs.

  7. Anon E Mouse

    Mr.Sensible – Pretty much every single commentator in business says the budget is good for business – how would Labour’s jobs tax have helped employment? Just the NI increase alone would have taken £450 million from employees in the NHS alone – how can that help jobs and investment?

    The fact is if that last useless government hadn’t left us in the mess it has none of this would be necessary.

    I know without exception every single Labour government leaves office with unemployment higher, inequality higher and the economy in a mess but even considering in 1979 when the IMF were called in after Labour were kicked out, this time it really takes the biscuit.

    Tell me why you don’t approve of giving the poor more of their own money back by raising the tax threshold?

    Lastly the OBR said that under Labour’s plans unemployment would have been higher initially. It’s just sour grapes M.S and you know it…

  8. Jacquie Martin

    The OBR – which OBR might that be? The independent OBR who sit in the Treasury? The OBR who’ve just lost their top man who couldn’t be persuaded to stay until it was on a statutory footing? The OBR who came to the rescue of GO when the treasury leaked the story about the 1.3 job losses that GO inadvertently failed to mention would be lost as a result of the budget? Do you mean the OBR who claim the private sector will create double the number of jobs lost, even though the CIPD said there wasn’t a hope in hell’s chance of that happening given that it didn’t when we were last in a boom? Oh, that OBR.

    Well, they’ve showed they aren’t independent by saving Cameron’s arse just before PMQs. And neither Martin Wolf, Larry Elliott or David Blanchflower think this gamble is going to work. Even the IoD aren’t that confident. And then there’s Charles Dumas warning against cutting the deficit too quickly. So, no I don’t have a lot of faith in the OBR – they’ve shown themselves to be tame poodles giving GO his cover to make cuts that’ll destroy the economy and the country. Only they blew their cover. What happens to agents that blow their cover? Unemployment? Or worse?

    I think you could be right Mr Sensible.

  9. Mr. Sensible

    Thank you, Jacquie.

    I rather think Mr Mouse should read this morning’s summary again.

    Both the Guardian and Telegraph indicated a fall in business confidence in the service sector, and I believe the Guardian article said similar falls had occured in manufacturing.

    And it’s interesting that Mr Mouse talks about the impact of the ‘jobs tax’ on the NHS, but I believe LFF reported a couple of weeks ago that it will have to pay more in overheads from the VAT increase.

    I have to say though, Jacquie, the OBR has given Labour a reasonable amount of help in that it revealed that the deficit would have been lower under Labour’s plans than Darling himself forecast, and they said that under this budget the economy will grow slower next year than it would under Labour’s plans.

  10. David Nash

    UK OBR mysteriously predicts 3.5% output growth from exports ovr nxt 5 years, my colleague tony dolphin asks who's buying http://j.mp/b47TaC

  11. Dan McCurry

    The main reason the UK has been unproductive in the past is that Sterling has been boosted by North Sea oil and the expansion of the City of London. With our oil in decline and the City resized, it’s likely that the exchange rate is going to be more competitive than it was, but there’s no good reason for it to remain rock bottom.

    We do need to get back to making things and the fact that our brightest are no longer going to be swarming on the financial sector will actually help this. But the idea that the shrinking of the public sector will automatically cause the private sector to boom is wishful thinking. The public would crowd out the private if we were in a period of full employment. We’re a long way away from that now, so to cut the public sector at the moment is less to do with sound economic planning and more to do with Tory dogma, especially when you take into account that the debt is 15-25 years from redemption and there’s no such thing as a variable interest rate on gilts.
    All they have to do is stop any further expansion of debt and that would be helped by avoiding further unemployment in the short term. However, that’s not what they want to do and they’ve succesfully encouraged a number of other large economies to also make drastic cuts right now.
    No wonder the stock exchange is tanking.

  12. Mr. Sensible

    Good point, Dan.

    And can you tell me where the insentive is to manufacture given that George osborne has cut away the capital allowances for it?

  13. Mr. Sensible

    ” biscuit.

    Tell me why you don’t approve of giving the poor more of their own money back by raising the tax threshold?/2

    Mr Mouse, that assertion is disputed by Tim Horton and Howard Read, as you well know.

  14. Mr. Sensible

    ” biscuit.

    Tell me why you don’t approve of giving the poor more of their own money back by raising the tax threshold?”

    Mr Mouse that claim is disputed, as you well know.

  15. Mr. Sensible

    Oh goodness it’s come up twice!

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