06 Mar 2012

Although the UK economy emerged from recession in the third quarter of 2009, progress in the past 18 months has been painfully slow.  It has become all too apparent that the two key drivers of growth during the boom years, namely spending by households and by the government, are unlikely to make anything like the same contribution as they continue to work off excesses of debt.

Those in charge of economic policy have therefore pinned their hopes on a so-called 're-balancing' of the economy, whereby growth is driven - to a greater extent than in the recent past - by investment and by exports. As far as investment is concerned, these hopes have yet to be fulfilled, with official figures showing that overall investment spending fell by 1.7% during 2011.  But there are grounds for hoping that an improvement in the trade position is now under way. The second estimate of GDP for the fourth quarter of 2011, which was released by the Office for National Statistics on 24^th February, showed that net trade (the difference between exports and imports) made a very respectable contribution of 0.6 percentage points to overall growth. In other words, without net trade the decline in overall GDP of 0.2% would have been a more worrying fall of 0.8%.

The detailed trade figures for last year show that, as usual, the often-overlooked service sector made a big positive contribution, posting a net surplus of just over £70 billion during the whole of 2011.  This sector experienced only a relatively minor dip in sales during the global downturn of 2009, and two years of solid growth since then mean that earnings from overseas in 2011 amounted to some £190 billion, more than double the total of ten years earlier.

UK goods trade 2009-2011

Source:  ONS

At first glance, the headline figure for trade in goods during 2011 was not as impressive, the deficit of £99 billion being marginally higher than in the previous year.  Some of that though, was attributable to a bigger deficit on trade in oil, which amounted to some £11 billion. It was also the seventh consecutive year that the UK has run a deficit on oil, highlighting that the era when North Sea oil generated big surpluses is now well and truly behind us. 

On a more positive note, however, underlying export performance remained relatively healthy. Excluding oil and so-called 'erratic' items (ships, aircraft, precious stones, and silver), and stripping out the effects of inflation, the volume of exports rose by 6.6% in 2011, building on the previous year's solid 12% recovery.

Equally important in this context is the changing geographic pattern of UK trade.  The value of sales to other EU countries rose by 12% last year (in volume terms the increase was a more modest 2.4%).  Given the problems in the Eurozone, this was arguably a better performance than might have been expected, though it has to be remembered that economic downturns in overseas markets often take some time to be reflected in trade volumes.  Sales to the EU still account for slightly more than half of UK exports but it is a share that has been falling steadily, and will inevitably decline further in coming years as austerity programmes across the Eurozone crimp demand in those markets.

UK goods trade:  top trading partners in 2010 and 2011

Source:  ONS

From scrap to cars

The solution, as economists are continually banging on about, is that Britain must become more adept at selling to the world's faster-growing emerging economies.  Sales to these markets have indeed grown strongly in recent years - though not always at a pace that might reflect the overall growth of those economies, meaning that the UK has still tended to lose market share. Exports to China, for instance, have surged from £1.7 billion in 2001 to just shy of £9 billion last year. But over this period the UK's share of this market has fallen from 1.4% to 0.8%.  More recently however, accelerating sales growth has arrested this decline, the UK share having held at this level since 2004.

This is largely thanks to the exporting success enjoyed by the UK's manufacturers of luxury cars.  In the five years to 2011, the value of car exports to China increased twentyfold to reach £2 billion. Moreover, with motor vehicles and their engines now accounting for just over a quarter of exports to China, they have surged past scrap metal as the largest product category.

UK exports to China:  scrap metal and motor cars

Source:  HM Revenue & Customs

From PIIGS to BRICs

Exports to other emerging economies have also grown rapidly, though for most of the past decade it was still the case that Britain sold more to Ireland than to the four 'BRIC' economies (Brazil, Russia, India, and China) combined.  That incongruity has now disappeared, helped by an impressive 22% rise in sales to BRIC countries during 2011.  A similar change is evident in the relative importance of the four 'peripheral' Eurozone economies (Greece, Italy, Spain and Portugal). Back in 2001, UK exports to those countries collectively were worth four times as much as sales to the BRICs, but by last year the gap had almost disappeared.

The further shift in the geographic pattern of trade is an important - and positive - feature of the UK's trade performance in 2011.  If this progress is sustained, it provides grounds for hoping that opportunities in faster-growing emerging economies may offset a more subdued environment in Europe during the next couple of years, as well as providing a much-needed boost to Britain's anaemic economic recovery.

Source:  ONS

Meredydd Davies
HSBC UK Economist

Prepared by the HSBC Business Economics Team
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