EY ITEM Club Special Report on Exports
A disappointing export performance ...
The recent modest growth in UK exports is particularly disappointing in light of the sharp fall in the sterling in 2008–09, which should have helped to rebalance the economy towards exports. In the four years since global trade collapsed in Q2 2009, the UK’s merchandise export volumes have risen by 24%, whilst services export volumes expanded just 8% – giving overall export growth of 17%, compared to Germany’s 34% over the same period. This performance from the UK has only been strong enough to maintain the country’s share of global exports of goods, following many years of decline. And the slower growth of services exports means that the UK’s share of total exports has continued to fall.
… reflecting patchy demand in key overseas markets …
The UK’s underperformance in exports has been partly due to weak demand in key markets such as the US, which has been labouring under the after-effects of the financial crisis (and more recently fiscal uncertainty), and the EU, where demand has been weighed down by the sovereign debt crisis. But, especially disappointingly, the muted growth in exports also reflects comparatively slow progress in penetrating fast-growing emerging markets. In addition, the UK’s comparative advantage in services, the demand for which is less price responsive than for goods, has limited the positive impact of sterling’s depreciation.
… and structural deficiencies at home
Alongside weak demand abroad, UK exporters also face a number of structural problems that hamper competitiveness and export growth. Despite the fall in sterling, the rise in UK competitiveness between 2006 and 2012 lags well behind the US and Germany, as does the UK’s performance on relative wage costs. Specific issues facing UK exporters include a mismatch between the supply and demand for skills, including foreign languages; the UK’s relatively poor transport infrastructure, with the World Economic Forum’s global competitiveness ranking putting Germany and France ahead of the UK in road, rail and air transport; and relatively limited access to credit for smaller UK firms.
Our baseline forecast: gradually accelerating growth in exports
Whilst recent performance has been disappointing, our baseline forecast for UK exports sees a gradual acceleration in growth over the medium term. These gains will be underpinned by growing demand in key markets – especially the EU and US – and the knock-on impact of previous gains in competitiveness. As a result, we expect export volume growth to average 3.6% between 2013 and 2023, and for export values to grow by 5.7% over the same period. We project that the strongest growth will be in exports to emerging markets, notably larger economies such as India, China and Pakistan. Growth in sales to developed economies will be more muted, but will pick up as economic growth and demand continue to recover.
Targeted improvements could generate significant economic gains
If the government can implement reforms and increase investment to address the structural deficiencies we have identified, both exporters and the wider economy would benefit. Using an analysis conducted by the IMF, we estimate that reducing the cost of opening a business to the lowest available in Europe, raising the average level of schooling by two years (a step the Government has already implemented), and investing an additional £20bn in infrastructure would increase export growth by 0.4 percentage points a year. This is equivalent to £13bn more exports by 2023 (at 2010 prices), 1.9% higher than our baseline forecast. As a result, GDP growth in the long run (2018–23) would average 2.7% a year, up from 2.6% in our baseline. Reforms in other areas would build on this, and could increase export and GDP growth further.
Emerging markets: turning underperformance into opportunity
As the UK strives to revitalise exports, its priority should be to improve its performance in penetrating fast-growing emerging markets. Demand from emerging markets has grown strongly in recent years, but sales of goods to the BRICs account for just 4.9% of total UK goods exports in 2012, up from 2.6% in 2000. In contrast, Japan, the US and Germany have all expanded their goods exports to these markets significantly faster, with – for example – the proportion of German exports going to the BRICs surging from 3.9% in 2000 to 9.2% in 2012. Whilst UK companies clearly need to target these markets more effectively, the UK Government can also help by working to improve the UK’s image abroad – a need that makes the current UK trade mission to China particularly well-timed.