UK: A DEFICIT OF CONSUMER LOYALTY. - There is little hope of reducing the current account deficit, says David Smith, as long as the UK's industrial base remains too small to keep fickle British consumers happy.

Last Updated: 31 Aug 2010

There is little hope of reducing the current account deficit, says David Smith, as long as the UK's industrial base remains too small to keep fickle British consumers happy.

Here is a puzzle. Why does the UK, which has a competitive exchange rate, an enviable record in attracting inward investment, a flexible labour market and a recent good record on productivity growth in manufacturing (described in this column last month) import more manufactured goods than it exports? And why does France, with an overvalued exchange rate, a poor inward investment record, over-powerful unions and a mediocre recent record of productivity growth, continue to run a trade surplus, including one of more than £1 billion with Britain?

In my opinion, one of the big disappointments about Britain's economic performance last year was the failure, against the backdrop of sterling's post-ERM (exchange rate mechanism) devaluation and sluggish demand at home, to record a surplus on the current account of the balance payments. Instead of the surplus that looked perfectly possible in the early months of 1995, the outturn for the whole year was a sizeable deficit. This was partly due to a poor performance by the so-called invisibles sector, with overseas financial earnings hit by the Barings crisis. But there was also a substantial deficit in trade in non-oil goods.

Too small an industrial base?

One explanation which gained credibility towards the end of 1995 was that British companies had overstocked with imported goods, and that, as this unwound during 1996, the trade position would improve. As yet, however, there is no sign of this happening. Instead, exports have suffered from the downturn in European markets and imports have continued to grow strongly.

I wrote about this recently, noting that the share of the new car market taken by imports had actually risen since sterling's post-ERM devaluation, from 55% to around 61%. By way of response, I received a couple of pieces of information. The first, from someone attending an annual exhibition of machine-tool manufacturers in Birmingham, questioned my gloomy tone. My caller pointed out that British machine-tool manufacturers were enjoying their best business for 30 or 40 years.

Only as the conversation progressed did he concede that the number of firms which were benefiting from these conditions was a mere fraction of what it had been all those years ago. Indeed, even compared with five years ago, the industry had shrunk.

We come back to a familiar explanation. British industry is becoming more efficient and competitive, but there is not enough of it. The industrial base is too small to support the economy's consumption base. All of the Government's exercises in improving Britain's industrial competitiveness, with the third White Paper on the subject just published, cannot overcome this basic fact.

I found the second response more interesting. It concerned the preferences of British consumers, contained in a survey by Bozell, a marketing communications company, and Gallup, the polling and market research organisation. The Bozell-Gallup survey asked, among other things, how consumers in 14 countries viewed the products of their own countries and those of the others.

Home-grown loyalty

As might be expected, many exhibited a chauvinistic streak. In the case of Japan, 75% of consumers there thought that Japanese products were 'excellent' or 'very good'. None thought that Japanese products were poor. Next, for Japanese consumers, came Germany, with a 45% ranking, followed by the US (37%) and Britain (32%). In the case of French consumers, 45% ranked French products as excellent or very good, followed by German products (35%), Japanese products (25%), US products (18%) and just 11% for those from the UK. It is not for nothing that the word chauvinism derives from the French language.

But the preferences in the survey among British consumers tell a different story. Did they, like their French counterparts, rank domestically manufactured goods above all others? Did they hell! Only 27% of UK consumers thought British products excellent or very good, a lower ranking than that given to British goods by the Japanese and, incidentally, by the citizens of Hungary (62%), India (38%) and Thailand (32%). British consumers thought more of goods made in Japan (43%) and Germany (38%).

It could be that British consumers are trapped in a time warp, in which memories of bad industrial relations, late delivery times and unreliable products intrude on the new reality of steady improvement. Even so, these results are profoundly depressing. French industry, while less successful in export markets, appears to have the same advantages as Japan in terms of the strength and loyalty of domestic consumers. Britain, plainly, does not.

Time to 'Buy British' again?

Is there anything that can be done to improve this situation? As an economist my argument would be that in the end quality and price will win through, and that the more competitive British-made products become on both these scores, the more such prejudices will be overcome. But as a realist, I would expect this to be a painfully slow process.

The 'Buy British' campaigns of the past seem like ancient history - though some may remember the one spearheaded by Robert Maxwell.

There is also, unless I have been misssing it, considerably less emphasis on 'made in Britain' labels at the point of sale. The question of replacing the trade surplus on oil, currently running at an annual £4-5 billion, will have to be addressed at some stage. For the moment, however, a strong pick-up in consumer demand will be reflected, inevitably and damagingly, in a strong rise in imports. Until there is a decisive shift in the preferences of British consumers, that current account surplus I hoped for will remain elusive.

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