Hamish McRae: Let's pay attention to our service sector: you know it makes sense

Economic view

The trade figures don't look good; not dreadful, just not as good as they ought to be given what else we know about the economy.

It is growing again and we will get revised first-quarter figures confirming that tomorrow. But instead of exporting our way out of recession, all that seems to be happening is that faster growth is sucking in more imports. Contrast that with what is happening in Germany, which is experiencing rapid export growth but little increase in home demand.

This at least seems to be the message from the trade figures. We had the May ones on Friday and the chart summarises the trend over the past three months. As you can see, the trade gap in goods has been steadily widening, and though there has been some increase in the surplus on trade in services, this has not been enough to stop the deficit widening too. If you think of this in demand terms, what it means is that there is a leakage of demand from the UK to other economies: not all the increased demand is going towards increased UK production. The overall deficit, at £3.8bn, is the largest monthly one since August 2008.

This, to be sure, is just one month's figures. Everything we know about trade data tells us to be suspicious of drawing hasty conclusions on that. The overall current account deficit has declined as a percentage of GDP over the past couple of years and is running at around 2 per cent, which is perfectly acceptable. But there are a number of aspects that are disturbing.

The first and most obvious is that, for whatever reason, we do not seem to be gaining much traction from the recovery in world trade. This may be partly because our physical trade – as opposed to our trade in services – is still largely directed towards Europe and that is a slow-growing market for all the reasons we know. Nothing can be done about that in the short term but in the medium one we obviously have to direct our attention away from slow-growing Europe to fast-growing Asia. That is already happening. Expect India to be buying more Land Rovers in 10 years' time than any European country, particularly now that Tata is in charge. The issue is whether those Land Rovers will be built here or there. We can guess the answer to that.

A second disturbing matter is the extent to which exporters have been using the cheap pound to increase prices rather than grow market share. Last year that made sense: the game then was survival, and export profits were vital. Now the pound has recovered a bit, particularly against the euro, some of that advantage has been lost. But the main point is that we didn't seem to be gaining in our share of export markets despite that currency advantage, a contrast to what happened after the 1992 devaluation.

Third, looking ahead, we will gradually lose revenue from North Sea oil and gas. The country is now a net importer of gas and it is becoming one in oil too. Some months we are square, while in others we are a net importer – in May to the tune of £300m – but as the years go by this will gradually climb. Not a catastrophe, just an increasing drag on living standards, for the more we have to pay for imported oil the less we have available to pay for other imports.

The great question all this raises, though, is one of strategy. We have a strong position in service exports, one that, despite the hit taken by financial services, is still delivering increased surpluses. Should we not be supporting that success more actively?

The trouble is that service exports are much harder to get a handle on than manufactured ones. The very phrase "invisible exports" captures this difficulty. The data is harder to collect and it is much more difficult to see where the money is going from and to. The monthly release from the Office for National Statistics is 31 pages long. only one page is about services.

Viewed from outside the country, this failure to promote the things we are good at seems odd. I was talking the other day with a City luminary who had just come back from China after advising them on developing financial services. The things they were interested in here were not our manufacturing because they felt they could do that better, and certainly cheaper. It was our top universities, our top schools, our expertise in finance, our architecture, our scientific research and so on. I am told the British pavilion at the Shanghai Expo – the one that looks like a sea urchin – has been a wonderful showcase of our creativity.

"When I saw the design I thought it was dreadful," I was told by a British visitor, "and I was completely wrong."

None of this means that we should neglect or downplay manufacturing. Some things are much better made close to home. If you want to print a snazzy, full-colour book you go to East Asia; but if you want to print a black-and-white one that you need on sale next week, you do it in St Ives.

Manufacturing that has a high craft element or is in some way associated with university research is again better done here. It is just that we have to work to our competitive advantages, and not try to compete against people on the other side of the world on much lower pay rates.

What worries me is that we are going to be ideological about this. All this talk of rebalancing the economy could mean rebalancing away from things we are good at and tilting towards things that other countries can do better – or at least cheaper.

We have been here before. There was great resistance to the then new industries of motor manufacturing prior to the First World War. One of the results of that was that much of the industry was located in places which had little or no tradition of manufacturing, such as Oxford, Luton and Dagenham, rather than the established centres of northern England, South Wales and Glasgow.

As a general business principle, you should pour resources into your winners and cut back your losers. You cannot do that with a country and in any case governments do have the power to direct operations in that way. But you can do damage. We have done some already over the past few years and we are in danger of doing more.

What I would like to see is more attention being paid to our service industry success stories, the chunk of the country delivering that £4.2bn surplus in May. I would like to see much more detail of how we are earning it: where we are gaining market share, where not, how much of it is profit on foreign investments, how much earned here, and so on.

And to say this is not ideology about one aspect of our economy being more important than another part; it is just common sense.

It's not the amount of foreign aid that matters, but how it is spent

One of the "ring-fenced" areas of public spending is overseas aid, for understandable and honourable reasons. Despite tough times at home, is it really right to make other countries, poorer than ours, suffer because we have cocked up our public finances?

The trouble is, this does not quite stack up. Leave aside the fact that most of the investment in Africa is coming from China and not from Western aid, or that India is now the second-largest inward investor in the UK, and focus on outcomes, not input. Some new research from the Centre for Economic Performance at the London School of Economics (and published in CentrePiece) concludes that if the UK's aid budget were spent well, current funding levels would be more than adequate and lower levels not inconceivable.

The research is by Dr Peter Boone, who makes the sensible point that the attention of the Department for International Development (DFID) should be on making aid work better, not on the amount spent. We should apply the same rigour to this form of spending as to others. Non-emergency aid should be stopped until its effectiveness is assessed, and all aid in future should follow best practice. At the moment, he argues, half our bilateral aid does little to reduce poverty – the supposed central aim of the department. We should take this as an opportunity to do everything better, not just to judge ourselves by the amount of money passed around. It cannot be right to have lower standards of scrutiny over overseas spending as there is over home spending. It is patronising, anyway, to accept lower standards from such countries just because they are at an earlier stage of economic development.

Also, it will be hard to retain public support for foreign aid in the light of spending cuts here, so it is in the interest of those involved, on both sides, to show value for money. Without public support, the present aid programme will find itself chopped, perhaps much more savagely, at some stage in the future.

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