Rumours of war are in the air. Currency war, that is. The US treasury has forged an alliance with Brussels to attack Germany's beggar-thy-neighbour approach to the rest of the eurozone.
Last week the Czech government said it would defend its economy by driving down the value of the koruna, following the aggressively interventionist example of Japan and Switzerland. It's not hard to see why the atmosphere is becoming less cordial.
This is a low growth world marked by over-capacity. Wages are under downward pressure and this is leading to ever-stronger deflationary pressure.
A lack of international policy co-operation means that countries are trying to export deflation somewhere else, using currency manipulation to do so. If a full-scale currency war does break out Britain looks as ill-prepared as it was for a military fight in 1939.
We like to think of ourselves as a nation of buccaneering traders but only 16% of small and medium enterprises, with a turnover of over £20m, are actually exporting.
We like to think of ourselves as the nation of innovators, yet as Richard Jones, of Sheffield University, notes, the UK is a less research and development intensive country than it was 30 years ago, and it lags well behind most of its rivals.The UK has linked trade and innovation deficits.
Jones, in a paper for the Sheffield Political Economy Research Institute, examines in detail how during the past 30 years the UK's corporate laboratories have vanished and how big R&D spenders such as ICI and GEC switched from being companies that thought about long-term investment to ones where the prevailing doctrine was to return the money spent on R&D to shareholders.
Those in charge of UK manufacturing companies became more interested in the next bid, the next deal and the next set of quarterly results than in developing new product ranges.
The consequences of decades of neglect of the country's productive base and an over-reliance on North Sea oil and financial services are now glaringly apparent. In the past, recessions have ended with the current account broadly in balance.
This recovery starts with a current account deficit of more than 3% of national output. This is despite a fall of 20% in the value of the pound between 2007 and 2013, which in theory should have boosted exports.
In reality, exports grew by 0.4% a year between early 2009 and the start of 2013, compared with 1% a year in the previous decade. Ministers have a pat answer when quizzed about the poor performance of exports. It is, they say, the result of geography.
More than 40% of UK exports go to the eurozone, where growth is weak and demand for imports has collapsed. So the impact of sterling's depreciation has been blunted. This view is not shared by the Bank of England.
While admitting that the global recovery is patchy, the bank noted in its February inflation report that "the relative weakness of UK exports does not reflect particular weakness in its major trading partners".
It concluded that some other explanation was needed "to explain the disappointing performance of UK exports", and found it in a sharp drop in exports of financial services and the tendency of UK firms to use a cheaper pound to boost profits rather than increase market share.
The decline in exports from the City since the crash highlights the risks for Britain of the "eggs in one basket" approach.
As Ken Coutts and Bob Rowthorn note in a paper on the prospects for the balance of payments, the UK has gone from being a country that had a 10% of GDP surplus in trade in manufactures in 1950 to running a 4% of GDP deficit by 2011.
North Sea oil and gas were in decline, so energy added to the deficit by 1.3% of GDP. Food and government transfers to overseas bodies such as the EU, World Bank and UN were the other big debits.
On the other side of the ledger there were three sources of surpluses: financial services and insurance (3.1% of GDP); other knowledge-intensive services, which include law, consultancy and IT (2.5% of GDP); and investment income (1.1% of GDP).
Once all the debits and credits were totted up Britain had a current account deficit of 1.9% of national income. This rose to 4% of GDP in 2012. The recession has taken a heavy toll on two of the surplus sectors. Investment income has turned negative, and global demand for financial services has fallen.
This has affected the UK more than the other big global providers of financial services, the US and EU. According to the Bank of England, "This could reflect lower demand for UK financial services in general, or a particularly sharp fall in demand for those financial products in which the UK specialised prior to the crisis."
This is a polite way of saying that no one any longer wants what Lord Turner once dubbed the City's "socially useless" products.
Coutts and Rowthorn model what happens to the current account using assumptions for growth in the UK domestic economy and world trade, the level of UK competitiveness, oil prices, North Sea oil and gas production, and returns on financial assets. The baseline projection is that the current account is 3% of GDP in 2022.
Using a slightly more pessimistic assumption, the deficit swells to 5% of GDP. As the authors note: "A deficit of this magnitude would be a cause for serious alarm."
It certainly would be. The outgoing trade and investment minister, Lord Green, told a conference in the City to mark export week that there was no guarantee the rest of the world would be prepared to finance deficits of this size for ever.
The government has a target for raising exports to £1tn a year by 2020 – which will require them to grow by 9% a year. (The average since 2012 has been 5%.) We have heard the "export or die" message many times in the past, to little effect it has to be said.
It is not impossible to improve Britain's export performance, though doing so with the current economic model is a pipe dream.
It will require nurturing manufacturing, knowledge-based services and those bits of the financial services sector for which there is long-term demand.
Britain, Jones says, "needs to build a new developmental state, a state that once again takes responsibility for large-scale technological innovation as the basis for sustainable growth and prosperity".
Amen to that. If a currency war is brewing, we need the can-do spirit of 1940, not the head-in-the-sands approach of 1938.
theguardian.com
Last week the Czech government said it would defend its economy by driving down the value of the koruna, following the aggressively interventionist example of Japan and Switzerland. It's not hard to see why the atmosphere is becoming less cordial.
This is a low growth world marked by over-capacity. Wages are under downward pressure and this is leading to ever-stronger deflationary pressure.
A lack of international policy co-operation means that countries are trying to export deflation somewhere else, using currency manipulation to do so. If a full-scale currency war does break out Britain looks as ill-prepared as it was for a military fight in 1939.
We like to think of ourselves as a nation of buccaneering traders but only 16% of small and medium enterprises, with a turnover of over £20m, are actually exporting.
We like to think of ourselves as the nation of innovators, yet as Richard Jones, of Sheffield University, notes, the UK is a less research and development intensive country than it was 30 years ago, and it lags well behind most of its rivals.The UK has linked trade and innovation deficits.
Jones, in a paper for the Sheffield Political Economy Research Institute, examines in detail how during the past 30 years the UK's corporate laboratories have vanished and how big R&D spenders such as ICI and GEC switched from being companies that thought about long-term investment to ones where the prevailing doctrine was to return the money spent on R&D to shareholders.
Those in charge of UK manufacturing companies became more interested in the next bid, the next deal and the next set of quarterly results than in developing new product ranges.
The consequences of decades of neglect of the country's productive base and an over-reliance on North Sea oil and financial services are now glaringly apparent. In the past, recessions have ended with the current account broadly in balance.
This recovery starts with a current account deficit of more than 3% of national output. This is despite a fall of 20% in the value of the pound between 2007 and 2013, which in theory should have boosted exports.
In reality, exports grew by 0.4% a year between early 2009 and the start of 2013, compared with 1% a year in the previous decade. Ministers have a pat answer when quizzed about the poor performance of exports. It is, they say, the result of geography.
More than 40% of UK exports go to the eurozone, where growth is weak and demand for imports has collapsed. So the impact of sterling's depreciation has been blunted. This view is not shared by the Bank of England.
While admitting that the global recovery is patchy, the bank noted in its February inflation report that "the relative weakness of UK exports does not reflect particular weakness in its major trading partners".
It concluded that some other explanation was needed "to explain the disappointing performance of UK exports", and found it in a sharp drop in exports of financial services and the tendency of UK firms to use a cheaper pound to boost profits rather than increase market share.
The decline in exports from the City since the crash highlights the risks for Britain of the "eggs in one basket" approach.
As Ken Coutts and Bob Rowthorn note in a paper on the prospects for the balance of payments, the UK has gone from being a country that had a 10% of GDP surplus in trade in manufactures in 1950 to running a 4% of GDP deficit by 2011.
North Sea oil and gas were in decline, so energy added to the deficit by 1.3% of GDP. Food and government transfers to overseas bodies such as the EU, World Bank and UN were the other big debits.
On the other side of the ledger there were three sources of surpluses: financial services and insurance (3.1% of GDP); other knowledge-intensive services, which include law, consultancy and IT (2.5% of GDP); and investment income (1.1% of GDP).
Once all the debits and credits were totted up Britain had a current account deficit of 1.9% of national income. This rose to 4% of GDP in 2012. The recession has taken a heavy toll on two of the surplus sectors. Investment income has turned negative, and global demand for financial services has fallen.
This has affected the UK more than the other big global providers of financial services, the US and EU. According to the Bank of England, "This could reflect lower demand for UK financial services in general, or a particularly sharp fall in demand for those financial products in which the UK specialised prior to the crisis."
This is a polite way of saying that no one any longer wants what Lord Turner once dubbed the City's "socially useless" products.
Coutts and Rowthorn model what happens to the current account using assumptions for growth in the UK domestic economy and world trade, the level of UK competitiveness, oil prices, North Sea oil and gas production, and returns on financial assets. The baseline projection is that the current account is 3% of GDP in 2022.
Using a slightly more pessimistic assumption, the deficit swells to 5% of GDP. As the authors note: "A deficit of this magnitude would be a cause for serious alarm."
It certainly would be. The outgoing trade and investment minister, Lord Green, told a conference in the City to mark export week that there was no guarantee the rest of the world would be prepared to finance deficits of this size for ever.
The government has a target for raising exports to £1tn a year by 2020 – which will require them to grow by 9% a year. (The average since 2012 has been 5%.) We have heard the "export or die" message many times in the past, to little effect it has to be said.
It is not impossible to improve Britain's export performance, though doing so with the current economic model is a pipe dream.
It will require nurturing manufacturing, knowledge-based services and those bits of the financial services sector for which there is long-term demand.
Britain, Jones says, "needs to build a new developmental state, a state that once again takes responsibility for large-scale technological innovation as the basis for sustainable growth and prosperity".
Amen to that. If a currency war is brewing, we need the can-do spirit of 1940, not the head-in-the-sands approach of 1938.
theguardian.com
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