BRITAIN’s economy has performed splendidly over the past few years but it has had one disappointing feature — the weak growth of exports.
As this month’s inflation report from the Bank of England illustrates only too clearly, Britain’s share of world exports has been falling for many years, and the rate of decline has been accelerating.
The strength of sterling against the euro provides part of the explanation for the failure of our exports to keep pace with world trade. This is not necessarily a cause for serious concern, because the overvaluation is likely to be corrected by slower economic growth, subsiding house-price inflation and a downturn in interest rates next year.
More worrying is the downward trend of the last decade and more. This cannot be attributed to exchange-rate movements but is the outcome of geographical changes in Britain’s pattern of trade.
Much of the growth of world trade in recent years has taken place in Asia, and the unhappy truth is that — compared with other leading European countries — Britain has largely failed to participate in it.
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This is a huge failure of entrepreneurship by British business and it has to be remedied if the superior growth performance Britain has delivered since the early 1990s is to be sustained.
Export growth to continental Europe has broadly kept pace with international growth since the late 1980s. But our share of exports to the rest of the world, where growth has been dominated by the explosion of activity in China, India and the Asian tigers, has dropped by a third over the past decade.
The remorseless realignment of Britain’s pattern of trade away from the world at large towards continental Europe has resulted in the position illustrated in the chart above on the right. Last year 59% of British exports went to the EU, 15% to the United States, and only 1% each to China and India.
In 2003 the eurozone scarcely grew at all, America grew by more than 3%, accounting for a third of the growth in world trade, and China grew by about 10%, generating another third. So it is hard to avoid the conclusion that British business is pointing in the wrong direction.
As time goes on, this will become more and more painfully obvious. Long-term growth forecasts for different regions of the world made by the UN, the International Monetary Fund (IMF) and the World Bank all show a similar picture.
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The EU countries, with the exception of Britain and France, face a problem of ageing. It is so severe that the working populations of Germany, Italy and Spain are projected to fall by a third over the next 30 years. The prospects for the eastern European countries that have just joined the EU or aspire to do so are even worse.
This decline in the European workforce means that the EU is virtually certain to remain the slowest growing of the world’s major regions for decades — even if reforms succeed in increasing productivity growth. Japan is in the same boat.
The outlook for America is more cheerful. Although the population is ageing somewhat, the birth rate has remained more buoyant and the workforce is being swelled by a higher rate of immigration. Productivity growth has been much higher than in Europe in recent years, but even if this falls back, America is expected to grow at about double the rate of the EU.
Indeed, in many areas — particularly products and services for the younger population — most of the growth in the developed world will take place across the Atlantic.
But the looming changes in the giant economies of China and India and the rest of Asia are on another scale altogether. In countries like these, the economic contribution of a growing workforce is dwarfed by stellar increases in output per head.
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Productivity growth is particularly rapid during the early phases of “catch-up”. Investment can unlock enormous growth as millions of workers are switched from low- productivity jobs in subsistence farming to high productivity jobs in factories and cities. Assisted by foreign investment, emerging economies can rapidly adopt the technologies already employed in the developed world, where they took many years to perfect.
China, India and several other Asian economies in the early stages of catch-up are growing particularly rapidly. Trend growth in China is about 8%, and in India perhaps 7%. With tens, even hundreds of millions of people to redeploy as capital pours in, these rates could be maintained for decades.
What will all this mean for the economic fortunes of Europe, America, China and India? The chart above on the left, compiled by my colleague Jakaria Sardar, shows the projected gross domestic product (GDP) of these four regions to 2050. Strikingly, China’s economy becomes bigger than Europe’s within 20 years and bigger than America’s around 2040. India’s passes Europe at about the same time. The economic weight of the world is shifting fast to Asia.
But Britain is not positioned to take advantage of these trends. Our exports to these countries are particularly low. Most of the other leading European economies do much better. Germany exports seven times as much to China as the UK; even Switzerland exports more than we do to India, once the jewel in the crown.
Still more disturbing, investment by British companies in these countries is tiny compared with the flood of investment into America and especially the EU. More than 70% of our foreign direct investment is directed to Europe, ensuring that our economic future is bound up with the world’s slowest-growing region.
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It could be argued that the stage of development of China and India so far, with its emphasis on heavy capital investment, has favoured a capital-goods producer like Germany rather than a consumer and service-orientated economy like Britain. But this no longer holds.
A vast new middle class is rapidly emerging in the cities of India and China, with spending power of immediate interest to suppliers of a wide range of consumer goods and services, from cars to cosmetics and mortgages. And their spending power will go on rising rapidly.
There is no reason why British business should not participate to the full. There are plenty of businesses capable of developing or extending their international reach: of the 300 largest companies in Europe, more than 100 are in Britain. All that is required is energy, commitment and a determination to catch the tide.
It is difficult to understand how, when less than 60 years ago Britain ran a quarter of the world, our horizons can have become so limited to the continent of Europe.
Winston Churchill told General de Gaulle that faced with a choice between Europe and the open sea, the British people would always choose the open sea. Some of that spirit needs to be recaptured if British business is not to find itself locked into a future of low growth, leaving the country sliding inexorably down the league table of trading nations.
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Christopher Smallwood is economic adviser to Barclays. This is a personal view
David Smith is away