While chancellor George Osborne may have been hailed for his potentially historic changes to the pension system, his plans to boost the UK economy are under scrutiny.
The coalition is likely set to miss its target of doubling the UK’s annual exports to £1trn by 2020 – in spite of Mr Osborne giving a boost to export finance in the Budget – something which is a key pillar to the UK’s economic recovery.
The measures to boost exports included a doubling of total export credit finance to £3bn, with a reduction of roughly a third in interest rates on this credit; a freeze in the carbon floor price after 2016/17 to help energy-intensive UK manufacturing exporters; and the elimination of the two highest bands of air passenger duty, to reduce costs for exporters making regular trips to long haul destinations.
But economists say while the measures may help, the export target is likely unrealistic. John Hawksworth, PwC chief economist, says: “The target is ambitious, bearing in mind that total UK exports in 2013 were approximately £500bn.
“The implied average annual growth rate of roughly 10 per cent per annum (in cash terms, including inflation) is higher than expected world trade growth (also in cash terms) of 7-8 per cent per annum over this period.”
James McCann, OECD economist at Standard Life Investments, explains the forecast trend in export figures globally is likely to present a headwind.
“The IMF forecasts slower global trade growth of 5.5 per cent between 2014/18 and this will be even more subdued in the markets that the UK exports to, particularly the eurozone which accounts for roughly 45 per cent of total goods exports,” he says. “The UK would therefore need to achieve significant gains in market share to hit this target.”
Fiona Tait, director of Deloitte UK’s international markets group, adds the goal is “challenging” because of the UK’s “”recent lacklustre export results” but accepted the measures in the Budget should help medium-sized businesses to “realise their exporting ambitions”.
Mr Hawksworth thinks the sluggishness of UK exports has been due to relatively slow growth in the UK’s major export markets, primarily the rest of the EU.
But given the EU economy’s gradual recovery, led by Germany, this could underpin a gradual recovery in UK exports to this area. Ms Tait says there is a general lack of awareness among medium-sized businesses of the range of schemes and trade advisers in place to support them.
Mr McCann thinks competitiveness is the key driver of export performance and that supply side reform can help to foster innovation and productivity growth.
This can take a variety of forms, such as investment in infrastructure, increased flexibility in labour markets, education, boosting competition and research and development expenditure.
“Competitiveness can also be generated through weaker pay growth than one’s international peers, a mechanism that Germany has used effectively over the past decade,” Mr Hawksworth says.
“This, however, would have difficult political and welfare implications in the UK and is not an ideal driver of competitiveness.”
Mr Hawksworth adds the US, a key market for UK services exports, accounting for 17 per cent of total UK exports of goods and services, is now recovering with expected growth of approximately 3 per cent this year.
“This should boost UK exports to the US of business and financial services, in particular,” he says. “Emerging markets have seen more mixed fortunes recently, but still account for a much smaller proportion of total UK exports. The Brazilian, Russian, Indian and Chinese (Bric) economies, even including Hong Kong as part of China, accounted for only 8 per cent of UK exports in 2012, although this share has doubled in the past decade.
“In the longer run, we expect the Bric share of total UK exports to rise to roughly 16 per cent by 2030, but progress will be slower in the short run, as these economies have decelerated over the past couple of years.”
Ms Tait believes the UK’s service industries, including education, healthcare, financial services and real estate development, will continue to perform well, along with high-tech manufacturing, while other sectors that would benefit from greater support include creative sectors, such as fashion and film, and the rapidly-developing tech sector.
Mr McCann agrees that services are the success story in UK trade, growing 10 per cent annually on average between 2000/07, but that the tradable market for services exports is smaller than for goods, and faces more restrictive barriers.
“If we were to see international agreement on liberalisation in services trade, this would be a significant boost, but this looks far from imminent with little progress made as yet on this front in the World Trade Organisation’s latest trade negotiations called the Doha Round,” he says.
Ms Tait says the UK needs to encourage exports to large mature markets, such as the US and high growth markets, such as Africa, China and India.
“Deloitte analysis of the 20 high growth markets identified by UK Trade & Investment forecasts that these markets will increase their share of global GDP from approximately 30 per cent in 2011 to more than 35 per cent by 2020.
“Over this period, Deloitte estimates their imports will swell from £4.2trn to £10.2trn. Therefore, even if these markets experience some short-term blips in overall growth, they still represent a huge prize for UK businesses with export-led strategies.”
