Not for nothing is economics hailed as the dismal science. Since the financial crash almost seven years ago virtually every economic orthodoxy has been confounded by raw experience. The UK’s deepest post-war recession should have heralded unprecedented levels of unemployment. By contrast not only were the downturns of the early 1980s and early 1990s not replicated, but the coalition government oversaw a jobs miracle with employment levels today at an all-time high. The impact of £375 billion of Quantitative Easing and over six years of continuous near-zero emergency interest rates should by rights have resulted in runaway inflation. Yet the news from the real economy in May 2015 was the first dose of monthly deflation in sixty years. (Incidentally discount much of the alarmist nonsense about this temporary drop in average prices – once last year’s oil price collapse drops out and the wage rises of recent months are fed into the statistics, inflation will be back into positive territory.)
More worryingly, however, are two persistent deficits. As we know, for all the talk of ‘reckless austerity’, the past five years have seen the Treasury adopt a more pragmatic approach to social cohesion than its critics have credited, with the budget deficit still the second highest amongst developed nations at 5% of GDP. It is the current account deficit, currently at some 5.5% of GDP, which has also ebbed and flowed contrary to expectations. As sterling slumped in 2008, depreciating by over one-quarter, conventional wisdom anticipated an export boom. This did not come to pass; meanwhile the 15% rise in the UK’s currency value over the past two years has thankfully not impacted even more adversely on that trade deficit.
Not that there is any cause for complacency. One of the central planks of the Treasury’s economic plan in 2010 was to rebalance the economy by promoting savings, investment and exports. By any objective measure, five years on this is still very much work in progress. The UK’s share of global exports has continued to contract – from 5.8% at the turn of the century to 3.6% in 2010, and down to just 3.3% today. Whilst the continued rise of China and India as global economic players clearly has a part to play in this, it is worth noting that Germany’s export performance remains as robust today (an 8% global share) as it was fifteen years ago. It is sobering to reflect that if we had been able to maintain our share of the fast-growing export growth markets, the current account deficit would have been wiped out over the past five years.
It is not for lack of initiatives. Many seasoned diplomatic watchers have been aghast as our own FCO has rebranded itself almost exclusively in the direction of old fashioned mercantilism and trade promotion. Let’s hope UKTI’s work starts to bear more tangible fruit soon. I know it is still achingly unfashionable to say it, but we are world leaders in financial, legal and business services and global demand is returning in these spheres – so too in the biotech, pharmaceuticals and the creative industries, where the UK’s comparative advantage remains clear.
Meanwhile as we continue to spend beyond our means we need to recognise that much of our current account deficit is funded by foreign direct investment. As a proud global trading nation I am not suggesting we should shun Qatari, Chinese or even Russian investment in our economy, but it is worth remembering that the income that these assets (whether stocks or smart new office blocks) will produce in the decades ahead is liable to be exported from these shores. How will the next generation of UK pensioners be able to fund their retirement if the asset base of domestic pension funds continues to be depleted in this way?
More urgent still whilst the political risk of an anti-business Labour/SNP government has been put to bed, what if turmoil in the emerging or Eurozone markets or a sharp correction in the UK commercial property market triggers a withdrawal of some of this foreign investment? The prospect of higher credit costs making the servicing of our burgeoning debt pile ever more difficult should not be ruled out. It makes it all the more important that we promote our LTEP with renewed vigour.
More business investment should also help boost the UK’s perplexingly poor productivity record. Ironically during the recent General Election campaign Ed Balls’ determination to play down Labour’s ‘tax, spend and borrow’ image meant that he felt unable to propose a substantial boost to infrastructure investment. Historically low interest rates may now allow a Conservative government to take on this mantle. Borrowing to invest in infrastructure and our lamentably lagging skills base potentially provides the best shot in the arm to reverse the UK’s weak productivity record in many sectors.
In short, it is high time to ramp up that long-term economic plan!