A number of commentators have recently called for a currency devaluation as a way to revive the British economy and outgoing bank of England Governor Mervyn King has described a recent very modest rise in the value of Sterling as ‘unwelcome’.These calls tend to ignore the fact that Britain has already had very substantial devaluation. As the Bank of England chart shown in Fig. 1 below shows the decline in the pound’s exchange rate index (ERI) from 2008 onwards. The ERI fall was nearly 30%, with a slightly larger fall against the US Dollar and a less pronounced fall versus the Euro. The recovery in the currency’s exchange rate has only been a partial one.
There are usually two main effects arsing from a sharp currency devaluation. One is to increase the price of all imported goods which cause inflation. This is what happened and the British economy was the only major economy to experience both a sharp economic downturn and a rapid rise in inflation during the crisis. The other usual effect of currency depreciation is to cheapen the price of exports in foreign currency terms, and so provide a boost to exports and the growth and jobs that depend on them. But following that devaluation exports have barely grown in volume terms.
From their pre-recession peak exports fell by 11.3% to their low-point. They have since recovered but were still 0.8% below that peak in the 2nd quarter of 2012. Since George Osborne announced the ‘march of the makers’ as the theme of his first budget in 2010 export volumes have actually fallen by 0.4%. This is possibly the only time in British history where there has been a very substantial currency depreciation and no recorded improvement in export performance.
This is a remarkably bad performance given that world trade has expanded since the recession of 2008 to 2009, according to the World Trade Organisation, by 13.8% in 2010 and by 5% in 2011. It is also a remarkably poor performance even compared to sluggish major trading partners. Fig. 3 below shows export volumes compared to both the US and the Euro Area. Euro Area export volumes are now 3.6% above their pre-recession peak while US exports have increased by 8.3%.
Of course, these are not the strongest performers. As a group, Newly Industrialising Countries’ exports have risen by approximately 50% over the same period according to WTO data.
There are numerous reasons for the exceptionally poor export performance of the British exports over the recent period. Patterns of trade are highly dependent on the weak export markets of the industrialised countries, financial services played a disproportionate part in the exports of services during the upturn, exporters responded to the devaluation by raising prices rather than winning market share, and so on. But all of these can be essentially reduced to the current problem of not producing enough goods or services that the rest of the world needs to buy. To correct that requires investment.
Given that the private sector remains on an investment strike, the government could respond as a minimum by investing in high-speed rail links, improved port facilities, super-fast broadband and through investing in education by scrapping fees and bringing back EMA. It could also remove the restrictions on visas including student visas so as to increase trade and educational ‘exports’. A government committed to creating hi-tech jobs would invest directly in carbon-reduction and renewable technologies for which there are very large and growing export markets. But that would all require a very different type of government.
Michael Meacher MP wrote in July 2012:
The UK trading performance is much more serious than most people realise. The last time Britain had a current account surplus was in 1983, 29 years ago. In the last 55 years Britain has only had a surplus on its traded goods in 6 years. Initially in the 1970s the surplus in services (insurance, shipping, etc. as well as banking) covered the deficit in goods, but from 1987 the deficit in goods rose much more sharply and a large net deficit between goods and services grew ever wider. By 2010 the deficit in traded goods had reached the staggering level of £99bn and the surplus on services at £49bn could cover only half of this. A yawning deficit of this magnitude cannot continue for long without the creditors (like any bank manager) calling time.
Why has this happened, and how can it be reversed? Our manufacturing capability has been allowed to decline long-term following Thatcher’s elevation of the City after Big Bang 1986 and the converse privatisation and selling-off of so much of the industrial landscape. The neo-liberal market made the manufacturing decline all the sharper by the preference for mergers and acquisitions over long-term investment, the sale of key British firms to foreign interests, the damaging break-up of crucial supply chains, the relentless emphasis on short-term profiteering over long-term market share, and the neglect of apprenticeships and quality training which along with the decline of R&D stunted UK productivity.
Yet in his 2012 budget, Osborne had the ‘nerve’ to trumpet the ‘march of the makers’ – the renaissance of manufacturing industry.
In the event the UK deficit in traded goods hit an all-time high at £100bn in 2010, a level nearly reached again even against a background of fading growth. There has been no rebalancing of the economy towards industry, no restructuring of finance, no spurt of entrepreneurship – just austerity and rising inequality.
An economic measure of a negative balance of trade in which a country’s imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets.