Is the economy rebalancing as proposed?
It is coming up to 4 years since Osborne decided the UK economy needed to be rebalanced. By ‘rebalancing’, he proposed a self-sustainable and largely export led economy. An economy that no longer relied on the financial services of the City, which appears to benefit suited men who know better how to ruin an economy better than those on Downing Street know how to fix one. Moreover Osborne pleaded for an economy with a higher propensity to save as opposed to one which will pay the price for further unsustainable private and public debt. Four years on, there seems to be a lack of policy aimed towards accomplishing a rebalanced economy.
When the economic recovery began in 2009 the conditions seemed to be in place for a manufacturing exports-led resurgence. The pound depreciated significantly during the financial crisis, providing UK manufacturers with a competitive edge. And with domestic spending still slow, it wouldn’t have been surprising for UK firms to look to overseas sales for growth. Manufactured goods are the dominant element in international trade – accounting for 75% of all UK exports. However as expected it is the services industries which have driven the UK recovery. Service output has now passed its pre-crisis peak, whereas manufacturing production is languishing nearly 10% down on its early 2008 level.
Moreover, whilst the UK has many successful manufacturing firms, our strengths are concentrated in a small number of sectors – aerospace, pharmaceuticals, high-value engineering and car production. Britain does not have the broad manufacturing base which has allowed Germany to be so successful in expanding its exports to Asia and other high growth emerging market economies. However economists at Citi reckon the UK’s exports have risen by 182%, in cash terms, in the last 10 years – five times faster than the UK’s exports to advanced economies. Within that, exports to China have risen six-fold since 2002, and exports to India are nearly five times higher. Goods exports to emerging markets now account for nearly a third of our goods exports, up from 17% in 2002. However with the emerging market economies slowing down, our hopes of rebalancing further may be even more dependent on the Eurozone’s recovery than they were before.
Over the recovery, the private sector has created 1.5 million jobs – predominantly in services – greatly offsetting the reduction of about 500,000 in public sector employment. This ideological approach to rebalancing has been working, although it has been isolating those in the public sector greatly whose lack of skills and the lack of private sector employment in regions such as the North East mean they have added to the inconsistent shift from public to private sector growth.
The UK economy is rebalancing – but not as we expected. Rebalancing is happening within the services industries rather than in favour of the manufacturing industry. As long as this is accompanied by export success and rising employment, as it has been so far, we should welcome and support Britain’s services-led recovery.