Savings are key to the trade problem

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The Independent Online
Do we have a trade problem? Pessimists will argue that we are seeing the old familiar gripe of the British economy: whenever it starts to grow at all fast it sucks in a flood of imports, thereby creating conditions that lead, sooner or later, to cutbacks in demand. Optimists, however, will argue that the widening of the trade gap in the last quarter of last year was a freak, showing just how unreliable the data has become, and therefore is nothing to worry about. Which is right?

It is certainly true that the trade figures are seriously unreliable. They always have been poor, and on at least two occasions misreading of the figures had political consequences: the famous pounds 800m trade gap that Labour was supposed to inherit in 1964 was cut in half by subsequent revisions, while the sudden trade gap that helped to give Edward Heath victory in 1970 was shown to be a freak. But now, thanks to a change in the collection method of trade with the European Union, they have become even more unreliable.

This raises two questions. Are the figures really getting worse? And if so, should we worry?

When figures are known to be unreliable, there are two ways of allowing for that unreliability. One is to note whether they are doing what they 'ought' to do - whether they are part of a consistent pattern for the economy as a whole. It is indeed probable that the trade gap will have widened during the last three months of last year, for notwithstanding the slight downward revision of the GDP figures for the same period, growth was clearly quite strong right through the second half of last year.

The other way of reading poor data is not to look at the absolute numbers but to look at the trend. The idea here is that even if there is an error, it will be a consistent one. So what matters is not that there seems to be a trade gap, but that it seems to be a widening one.

So the answer to question one is: yes.

It is harder to give a similarly straight answer to question two. A modest trade gap is no problem. Not only do we have a reasonable surplus on the invisible trade account but we consistently under- record that surplus, so that when the figures show we are in current account balance, we are actually in surplus. A recorded current account deficit of around pounds 10bn is acceptable in relation to the size of the economy and the size of our net asset position.

But it is not acceptable for that to grow much further. It would be very easy to see a slide from an acceptable pounds 10bn a year, to a worrying pounds 15bn, to a dreadful pounds 20bn. Whether or not that will happen will depend on three factors: the behaviour of our main markets; structural shifts in the UK economy; and the response to the fiscal tightening in the Budget.

It is very hard to push exports up when demand in Germany (the largest single market) is falling and in France is stagnant. Just under 60 per cent of UK exports go to Continental Europe. Italy may pick up a little this year, but it is not reasonable to expect any material improvement in Continental demand during the next 12 months.

Structural shifts in the UK economy may help. There are two things to watch. The first is the extent to which the growth of UK car production improves the ratio of imported to exported vehicles. As the car industry comes right, many of the long-term structural difficulties of the economy will correct themselves, and thanks to Japanese investment such a long- term change is in prospect. Whether we see much this calendar year is another matter.

Depressed oil

The other factor is oil. While the UK remains a net oil exporter the trade account is sensitive to shifts in the oil price. This is currently very depressed. On a five or 10-year view it would be very surprising if the oil price remained in the middle teens, let alone the low ones. But it would be unwise to expect much improvement this year.

So not much cheer on items one and two; what about item three? This is the most interesting issue of all, for it concerns how we will react to the rise in taxation next month. If the rise in taxes comes principally out of savings, the trade account will tend to deteriorate. If it comes mainly out of spending, the trade account will tend to improve.

Common sense suggests that we will do a bit of both. In the long- term the country does need to save more - to spend a smaller proportion of GDP and to invest a larger one - if it is to sustain reasonable growth. The Government, by taxing us, will be saving more. But we can frustrate that by saving less.

So a real-life economic experiment is about to begin, in which the Great British Public are the guinea-pigs. Keep saving, have slightly slower growth, contain the current account deficit. Or save less, grow a little faster, but start to run into a more worrying deficit. We choose.

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