One of the potential upsides of the Brexit vote was that the slide in sterling would help rebalance the economy away from consumption to exports, reducing our dependence on indebted consumers. But it hasn’t worked out that way, says The Economist. Net trade has subtracted from growth, rather than added to it, since the pound began to slide. This depreciation of sterling, now around 15% down on its pre-referendum level when measured against a basket of trading partners’ currencies, could “go down as one of the least successful in history”.
There has only been a small rise in exports, measured in inflation-adjusted terms, compared with the bounce seen after sterling’s previous major slides in 1967, 1976 and 1992, according to The Economist. One problem may be that many exports rely on imported parts as companies are “locked into global supply chains. If exports rise, so do imports”. Nor do firms appear to be “in a rush” to exploit the competitive advantage that lower prices give them. For instance, ice-cream exporters sold around the same quantity in the first half of 2017 as in the same period a year earlier. “Firms seem to be using sterling’s weakness simply to bank their profits, rather than to move into new markets.” Across the private sector profitability is at near-record levels, yet investment is stalling.
But it’s too soon to give up on rebalancing. As Capital Economics points out, there is usually a long lag between the fall in the currency and the improvement in the trade balance; it has been two years in the case of recent significant sterling depreciations. The worry about imports automatically rising with exports owing to integrated global supply chains looks overdone. The “import intensity” of good exports has barely risen in ten years, while for services it has declined slightly. Demand for imports should decline slightly as consumption eases, thanks to a squeeze on real incomes. That implies a fall in demand for big-ticket items that tend to have many imported parts.
Meanwhile, recent “surveys of export orders… have gone from strength to strength”, as Pantheon Macroeconomics points out. The Confederation of British Industry’s gauge of export orders is at a 22-year high. This week a survey by the EEF, the manufacturers’ trade group, showed that the balance of firms who reported a rise in orders rather than a fall over the past three months has reached 33%, compared with -2% in June 2016. A boost to GDP from net trade may not be too far away now.