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Amid huge political ructions, Britain’s economy is still expanding. Latest figures show GDP growth of 0.3 per cent in the three months to February. Yet there is some evidence that stockpiling, to mitigate the risk of a no-deal Brexit, had an effect and the growth rate is appreciably slower than in the same period in 2018. Moreover, Britain’s trade balance is deteriorating. And that, on the face of it, is surprising. Whatever happens in Brexit negotiations, this is likely to be a stubborn problem for Britain’s economic prospects.
Or is it? What exactly is wrong with a trade deficit? It’s not as clear as conventional commentary, with its stress on exports as a desirable thing, makes out. It all depends on the reasons for the deficit.
Data released this week shows that Britain’s total trade deficit (goods and services) widened in the three months to February by £5.5 billion to £13.6 billion. Essentially, the goods deficit expanded by a lot and the services surplus expanded by a little. And it’s the goods part of the equation that is most significant: Britain’s goods exports fell by £1.6 billion while imports surged by £4.9 billion.
You can’t base too much on three months of data but the goods deficit is persistent and it’s intuitively surprising that imports should be so strong when the economy is merely chuntering along. There were big increases in imports of machinery and transport equipment (mainly cars) and of chemicals.
Part of this, again, is due to Brexit uncertainty. The chemicals figure includes pharmaceutical imports, which would be vulnerable to a no-deal Brexit. But the goods deficit is widening both with the European Union and non-EU countries, suggesting that it’s not likely to be reversed even under the rosiest of assumptions to do with Brexit.
It’s not inherently a problem but it may become one under certain scenarios. Though politicians and businesses often refer to a supposed need to boost exports, economists would typically see exports as a cost and imports as a benefit. Exports are what we give up in order to enjoy the benefit of expanded choice and quality. In addition, imports put competitive pressure on domestic industries in price and quality; consumers are the beneficiaries.
A widening trade deficit is a factor contributing to Britain’s longstanding current account deficit. This means that, by definition, there is a surplus on Britain’s capital account. Essentially, an inflow of capital from abroad enables British consumers to enjoy a higher standard of living than would otherwise be possible. That’s the benign way of looking at it. And a big current account surplus, such as Germany enjoys, can be a problem — it means that the surplus country can’t easily boost growth in a downturn by stimulating domestic demand. Growth will depend on the willingness of foreign consumers to carry on spending.
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For all that, a deficit can be a problem. It indicates an imbalance of investment and savings: there aren’t enough domestic savings to fulfil profitable investment opportunities. The gap is filled by foreign companies buying UK assets, which will generate cash flows for their owners away from Britain. And a persistent deficit may show, as it very probably does in Britain’s case, an unbalanced economy whose growth relies excessively on consumption. When consumption relies on drawing down savings, there’s a limit to the sustainability of growth. That broadly is where Britain now is. The economy isn’t collapsing but it is unbalanced. If Brexit takes place, it won’t correct that problem. It will instead make trade more difficult with our closest partners while transplanting the problems of a deficit to our trade with other markets. Britain’s fortunes do to some extent depend on selling more goods (and services) in those markets.
Oliver Kamm is a Times leader writer and columnist. Twitter: @OliverKamm