UK exports and world trade: 1980-2013

The UK recovery is reliant on a roaring trade with the tiger economies according to the quarterly forecast from the Ernst & Young Item Club. In its report, the Big 4 accounting firm says the economy has moved out of a decade of debt and into a decade of painful readjustment.

The report says business optimism has begun to improve and GDP data for the fourth-quarter of 2009, due out later this month, is expected to show that the UK exited from recession. However, the recovery is expected to be modest, built on restocking, the car scrappage scheme and the anticipated value added tax increase. Once these effects have run their course, ITEM says it is difficult to see where growth is going to come from, in the short term.

It forecasts that UK GDP "will struggle to reach grow about 1%" this year, with interest rates expected to remain flat well into 2010.

Eurozone growth is expected to be similar according to recent forecasts.

European Economy 2010: Transition towards a tepid recovery

ITEM said with world trade forecast to grow 8% in 2010, it forecasts UK export growth will 9% in 2011 and 10% in 2012.

ITEM Club: Economic Outlook for UK Business

Professor Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club said today’s outlook stands in stark contrast to the optimism that characterised the approach of the millennium - - an overvalued pound, little spare capacity, a lax fiscal policy and financial deregulation, which allowed for excessive borrowing and left the economy hugely exposed to the financial risks that led to its near collapse in 2008.

Spencer comments: “In the last decade Miss Prudence morphed into Miss Rosy Scenario and ultimately Miss Disaster Scenario. Mr Brown was guilty of running a large current account deficit even as the economy peaked, leaving little leeway for fiscal policy to be relaxed to deal with the credit crunch, and helping to explain why the UK remains in recession as other countries pull out.”

To avoid repeating the mistakes of the past and to ensure that the UK is on track to grow above 1% later this year and beyond, Spencer says, “it is vital the UK rejuvenates its overseas investment model and starts selling into countries such as China, where we have an exceptionally low market share compared to our leading competitors. The UK’s recovery is reliant on a roaring trade with the tiger economies.”

“After a decade of relying on the domestic consumer, companies have to start chasing overseas customers,” says Spencer, “This will require a major investment in people, products and processes. With the Anglo-Saxons stony broke, earning money from world trade has to provide the main stimulus to keep output growing, especially if the global imbalances are to be reduced.”

He adds, “Because we are not locked into the Euro, as are countries such as Ireland and Greece, the fall in the exchange rate will provide support. However, UK exports are not very price-sensitive and we think that the push towards overseas markets will mainly be driven by a lack of demand at home.”

Finfacts argues that with most of Ireland's exports made by foreign-owned firms and the majority of their export trade being intra-company and finished goods/services rather than commodities, a risky exit from the euro and devaluation would not bring manna from heaven export opportunities in Asian tiger economies. Why not try a change from instant solution seeking stroke politics i.e. fundamental reform to modernise: governance, the public sector, accountability systems and end the cartels in sheltered sectors of the private sector?

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The report says despite the gloomy economic situation of the last year, there are some reasons to be cheerful. The UK’s supply side performance over the last decade has put us in pole position to take advantage of the recovery. Low rates of inflation have allowed the Bank of England's interest rate setting MPC to cut interest rates right back to support the economy, and the cooperativeness of the UK workforce has been particularly impressive.

Spencer says, “The performance of the UK labour market since the beginning of the recession is remarkable when compared with the sharp fall in output. Companies and employees have agreed to pay freezes and reduced working hours in preference to redundancies, and this has had the double benefit of restraining unemployment while keeping our skills base and productive capacity intact for the upturn.

“Employment levels have fallen by just 2.5% in contrast with the US, Ireland and Spain where unemployment rates have almost doubled. Longer term, with inflation remaining relatively low, these supply side improvements hold out the promise that we could potentially return to a stable economic environment, provided that the imbalances in the UK and global economies are addressed seriously.”

A nation of savers?

UK households and companies have seemingly caught the savings bug. In the last 12 months there has been a huge increase in the savings ratio. It is estimated that households saved £74 billion in 2009, up from just £14 billion in 2008, while companies have been cutting back on investment and inventories. The private sector ran a financial surplus of around £150 billion in 2009, compared to just £50 billion in 2008.

However, the report says appearances can be deceiving - - these savings were only made possible because interest rates were cut back to the bone, giving households extra disposable incomes, while UK banks benefited from government bail-outs. In reality the nation’s financial surplus has been minuscule, with savings cancelled out by a huge public sector deficit.

VIDEO: Prof. Peter Spencer