The UK economy is showing signs of recovery, with the OECD raising its growth forecast for 2014 to 1.5%, but this recovery is not being driven by net exports. Despite a declining pound, the trade deficit has widened, largely due to poor export performance, particularly with non-EU countries. Achieving a balanced current account remains crucial for sustainable growth, yet ongoing challenges such as the euro crisis and supply-side constraints persist.

1. Liz Veal Economax Editor September 2013
Trading down?
As the pound’s value plummeted at the
start of the economic downturn in 2008-9,
economists hoped this might ultimately
pave the way for an export-led recovery.
And while it has been a long time coming,
there does seem to be an economic recovery
of sorts beginning to appear. The OECD
recently upped its annual growth rate
forecast for the UK economy in 2014 from
0.8% to 1.5%. However, the recovery does
not appear to be driven by net exports as
the trade figures in July 2013 were as
disappointing as ever!
While the newspapers are full of stories and analysis
about economic growth, inflation and unemployment,
many give less print space to the Balance of Payments.
Yet as all students of economics learn early on in
macroeconomics, achieving equilibrium of the current
account of the Balance of Payments is regarded as
a key objective of government policy. The current
account measures the value of exports less the value
of imports for goods, services, investment income
and current transfers. If the UK is importing more
than it is exporting then the UK is, put simply, not
paying its way in the world. A trade deficit can
constrain growth as aggregate demand growth will
be weaker and it is possible that higher interest rates
may be needed to attract lending from abroad to pay
for the UK’s overspend.
During an economic downturn, economists would
anticipate a reduction in spending on imports as
consumer confidence is low and businesses do not
want to buy capital goods from abroad. This should
improve the current account. Additionally, firms

2. struggling to sell in the UK will be incentivised to
expand their export markets, but the global nature
of the downturn meant this was difficult. Additionally
a fall in the £’s value should have boosted the UK’s
international price competitiveness. Indeed, the UK’s
current account did become marginally smaller in
2010-1. This improvement looks as if it could be
both temporary and somewhat insignificant. The chart
on the previous page shows the UK’s total trade
balance in goods less oil and erratic and there has
been no discernible reduction in the deficit for this
section of the current account in the past few years.
The July trade data was a disappointing blow among
mostly more optimistic statistics for the economy.
The trade deficit in July was more than double that
in June rising from £1.3bn to £3.1bn. If the wider
Liz Veal Economax Editor
deficit had been a result of rising imports this may
have signalled a boost to consumer confidence and
spending or rising capital purchases from abroad, but
analysts say that it was in fact due to poorer export
performance, particularly to non-EU countries.
If the UK’s economic recovery is not balanced, then
it may falter. An improvement on the current account
of the Balance of Payments is still needed, but there
are still issues to be resolved – the euro crisis, the
slowdown in the emerging markets and the UK’s
supply-side constraints. The Balance of Payments is
still an important indicator of economic performance
and perhaps deserves a higher profile in the press
and in the corridors of power.