Britain trades on thin ice

Alex Brummer12 April 2012

THERE is no better measure of the build-up of serious problems for the British economy than the trade figures for last year. These show that the deficit soared to a record £33.6bn, sharply up on the £30bn recorded in 2000.

Even after the trade in services is taken into account, the trade shortfall with the rest of the world was still an alarming £19.9bn.

Successive Chancellors have sought to convince us that the trade gap no longer matters if it can be comfortably financed.

Certainly, trade numbers are notoriously unreliable. But most economists believe that they tend to understate the trade gap rather than exaggerate it. The 2001 deficit reached historic proportions and represents in the order of 3.4% of total output as against the 4.1% shortfall in 1989 when Nigel Lawson was at the helm.

The significance of the deficit is that it provides a clear illustration of the relationship of Britain's domestic economy with the rest of the world. Great trading nation we may be but six years of negative manufacturing growth are taking their toll.

The main factors behind the deficit appear to be the burst in the technology bubble, the recession in much of the world economy and a loss of competitiveness. Ironically, the least deterioration in our trade has been with Europe, despite the fact that almost everyone believes the euro is undervalued against the pound.

So what should policymakers do to deal with the serious trade imbalance? A traditional remedy was to curtail consumption by tightening credit conditions. But the present system of an independent Bank of England and an inflation target does not allow for that despite an internal debate inside the Monetary Policy Committee.

The Engineering Employers' Federation favours measures to improve competitiveness by investment in skills and technology as well as reducing the cost of regulation. This is not very easy when the Employment Bill, winging its way through the Commons, imposes a whole new layer of costs on business through rights to paternity leave and full benefits for part-time workers.

The final and most important strand identified by HSBC economist James Butler is devaluation. He argues that the huge trade deficit suggests 'that sterling is massively overvalued'.

There is no escaping from the fact that there are mighty imbalances developing. These also are starting to be reflected in the public finances where corporation tax receipts are falling and public spending is rising. The result is a sharp turnabout in the government's finances from a surplus of £14.6bn at this stage of last year into a narrower £4.6bn now. So far the mettle of New Labour has not been tested in the heat of financial crisis. We may all have that pleasure to come.

Poor logic
MARKETS really have it in for technology stocks at present. Even the slightest disappointment has investors and analysts running for cover. So despite the fact that Logica was able to lift half-yearly profits by 21% to £78.5m in a dreadful global market place, its shares plummeted 20%.

The main concern is that Logica's lead in text messaging services is being eroded and that returns from this growth business are falling away. This is not that surprising given the saturation of the mobile market. When demand picks up, Logica believes that it may still have leading edge technology which will be valuable for the professional market.

One should not lose sight of the rest of the Logica business, which still makes it one of the few technology companies to achieve real returns. It is broadly spread internationally and the same kind of systems which it has sold into first world economies in the financial and utilities area are now going into emerging markets.

It may well be that Logica shares, like most of those in the technology sector, have been overvalued. But after a 40% correction since December it is starting to look as if the nervousness may be overdone.

Allfirst farce
THE more one learns of AIB's Allfirst subsidiary in the United States, the more one fears for the bank's independence.

A fraud which went on for five years does not inspire confidence. Nor does the disclosure by the Wall Street Journal that the employee responsible for monitoring foreign exchange risk at the Baltimore branch was 26-year-old Svetlana Tslav, hired only a year ago while still taking her masters degree in finance at John Hopkins University.

Soon we may discover that the auditor at Allfirst is still at junior school.

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