Trade gap shows we’re still playing with fire
George Osborne is in “I told you so” mode. Much to the Chancellor’s satisfaction, the International Monetary Fund has just upgraded its UK growth forecast for 2014 to 2.9pc – suggesting Britain will this year grow faster than any other G7 economy.
Just twelve months ago, with the UK in danger of triple-dip recession, the IMF reprimanded Osborne for “playing with fire”, urging him to abandon attempts to consolidate Britain’s public finances and speed up government spending instead.
Now, with the UK economy having already out-paced the developed world last year, and set to do so again, it’s the Chancellor’s turn to preach. “All this demonstrates that fiscal consolidation and economic recovery go together,” he told the IMF’s Spring meeting in Washington. “It also undermines the pessimistic prognosis that only further fiscal stimulus can drive sustainable growth”.
I’m delighted the UK economy is finally showing signs of life. Industrial production rose 0.9pc between January and February, the fastest expansion for 8 months. Manufacturing output was 1pc higher over the same period, its third consecutive monthly increase. Unemployment is falling and business investment is up – pointing to better times for countless British workers and their families. That can only be good news.
I’m also happy Osborne is thumbing his nose at the IMF. Under Christine Lagarde, the Fund has abandoned grown-up fiscal rectitude and “crunchy” policymaking to become a floppy neo-Keynesian talking shop. Why is the IMF run by somebody with no formal economics training who is meanwhile campaigning to become if not President of the European Commission then President of France?
The Managing Director of the International Monetary Fund should be a drab economist who actively courts unpopularity, delivering unwelcome fiscal truths to countries big and small. This is an honorable and necessary job, requiring someone with deep technical knowledge and nursing no ambition of elected office.
Lagarde, in contrast, has used her IMF perch publicly to undermine attempted fiscal retrenchment, while urging the European Central Bank to overcome German sensitivities and overtly join the “ugly contest” by conducting no-holds-barred currency debasement.
All this no doubt plays well not only with her native electorate but also with Europe’s banking lobby (a useful source of funds in any future election). Through her populist rhetoric and failure to give developing countries a bigger voice, Lagarde has damaged the IMF. Future historians will judge her harshly.
Having said all that, despite more encouraging growth numbers and Osborne’s IMF-baiting, the UK economy isn’t out of the woods. Recent data aside, Britain has performed badly since the 2008 global financial crisis. Our GDP remains some 1.4pc below its pre-Lehman peak, making us almost unique among the world’s advanced economies in having not yet fully recovered from the sub-prime collapse.
Manufacturing output is 8.9pc below its pre-crisis level. Industrial production overall is still 12.1pc adrift. Construction output, too, is 12.5pc lower than it was back in 2007 – astonishing, given the crucial role this sub-sector has played in previous UK recoveries.
Why is it, for instance, that fewer than 110,000 homes were built last year, a 5pc fall on 2012 and among the lowest peace-time totals in a century? Forget the “record housing start” numbers spun by minister and the house-building lobby – both with an interest in prolonging our disgraceful housing scarcity, so maintaining an upward price spiral. Just breaking ground constitutes a “housing start” – it’s completions that matter. The rising number of British households, hard-wired into our demography, means we need at least 250,000 new homes a year, more than double the current total.
Rather than enduring the brickbats of more builder-friendly planning or forcing developers to stop land-banking by levying meaningful fines, ministers have introduced then extended the dangerous “Help-to-Buy” scheme. By promoting demand, with little extra supply, this has stoked-up prices even more, generating a temporary feel-good factor for home-owners and banks nursing ill-judged property loans but blowing another dangerous bubble too. Housing, meanwhile, becomes even more unaffordable for a generation of youngsters who feel, understandably, destined never to own.
This move to boost house prices, while failing to address the underlying problem of an inadequate housing stock, is symbolic of the UK’s imbalanced recovery. The latest figures show capital investment up 2.4pc on the previous quarter. But such investment remains little more than 12pc of GDP, compared to 18-20pc in the US and Germany. And despite our perhaps unmatched trading heritage and international contacts, Britain’s external sector continues to act as a net drag on the economy.
Trade data attracts little media scrutiny. Yet it’s surely noteworthy that the UK’s current account deficit – our imbalance of imports over exports, plus net gains on overseas investments – was a stonking £22.4bn during the fourth quarter of 2013. That’s 5.4pc of GDP, only marginally down from 5.6pc the quarter before. As a share of our national economy, these are the largest two external deficits in British history. That sits uncomfortably with claims the government is rebalancing our economy away from domestic consumption and debt and towards exports and investment.
The UK trade deficit narrowed slightly in February. A £7.0bn monthly surplus in services imports (including financial services) was offset by a massive £9.1bn shortfall of goods exports. That resulted in a £2.1bn trade deficit overall, marginally down from £2.2bn the month before. This slight improvement, though, was due to slower imports, not higher exports. We exported just £23.6bn of goods in February, the lowest total since November 2010 despite “world-beating growth”. The UK’s current account deficit is expected to hit £6.5bn over the first quarter of 2014. So, yet again, our trading sector will undermine the broader economy.
The UK’s largest trading partner remains the Eurozone, of course, which remains in the doldrums and will struggle to expand by 1pc this year. Yet Germany still managed to chalk-up a massive current account surplus in 2013, no less than 7.5pc of GDP, not least due to extensive trade with emerging economies. German exports to these mass markets of tomorrow last year totaled no less than 14pc of its GDP. The UK equivalent was just 4pc, highlighting our failure to secure the market share necessary to ensure the prosperity of our children and grandchildren.
While Osborne is entitled to goad the IMF, and deserves credit for seeing off his critics, he should be careful of hyperbole. The Chancellor told those gathered in Washington that healthier banks and a credible plan to fix public finances are essential to securing growth. “In the UK,” he said, “these conditions are in place”.
If only. Britain’s banking sector remains bloated, with too-big-to-fail now even more of a danger than in the run up to the Lehman collapse. And for all Osborne’s talk of “austerity” and the faux outrage of Lagarde and other deluded, grand-standing Keynesians, our national debt is set to reach £1,600bn by 2018, twice as big as when Osborne took office in 2010.
By relying on QE, ever more state borrowing and busted banks, the UK, like most other large Western economies, is “playing with fire” as much as ever it was. The only difference is that, as usual, we’ve juiced-up our housing market in time for a general election. Underneath the hype, as the trade numbers show, sustainable recovery remains elusive.