The amazing success story of Britain's export revival is due in large part, says David Smith, to a two-stage phenomenon which has followed Britain's 1992 departure from the ERM.
I have a suggestion. Instead of the usual battery of individual Queen's Awards to Exporters this year, the organisers and Her Majesty could save themselves a lot of trouble. Just give one award, covering the whole of British industry, and send out the certificates in a single, massive mail shot.
The overall picture has been nothing short of amazing. Exports grew by around 10% in volume terms last year, compared with an increase of only 4% in the volume of imports. Manufacturers seized the opportunities available with gusto, recording an export rise broadly in line with the 10% overall increase, while the appetite of UK consumers for manufactured imports was tamed - they increased by only 5%.
In the July-September quarter of last year, the current account moved into surplus, by £800 million, occasioning a radical rethink among forecasters of the balance of payments outlook. Schroder Economics, for example, predicts a £7.4 billion surplus this year, rising to £12.6 billion next year, while Cambridge Econometrics has set out a vision of balance of payments surpluses stretching out into the indefinite future.
Not all of this, it should be said, is due solely to improved prospects for exports of goods. Interest, profit and dividends, a major component of Britain's traditional 'invisibles' surplus, are providing a substantial boost to the balance of payments position. Last year's improvement (the current account looks to have ended the year with a deficit of only £3 billion) was partly explained by a big North Sea oil revival, with energy exports up by some 15% and imports down by roughly the same amount.
But it is the performance of exporters I want to concentrate on. It is important to see the revival as a two-stage phenomenon. When sterling was dishonourably discharged from the ERM in September 1992, there was an immediate revival in price-sensitive exports. It could have been that this one-off benefit was the sole effect of the Government's unintended devaluation. But, as the chart shows, about a year after the pound's fall, there was a second-stage effect, with exports of finished manufactures overall, and some specific sectors within that, such as capital goods, rising strongly.
This delay is not hard to explain. Most exporters will tell you that it is not possible to simply turn on the tap of increased overseas sales, even when a sudden price advantage falls into your lap. There was, in addition, uncertainty in the wake of sterling's departure from the ERM. It is said, for example, that a majority of Cabinet ministers wanted to make a declaration that the pound would re-enter the ERM at the old parity at the earliest opportunity. Fortunately, good sense prevailed.
But the delay was not solely because of the normal lags and natural uncertainty. In the wake of sterling's fall, exporters were criticised for raising their prices. The inference was that firms were going for profit rather than overseas market share, neutralising the beneficial trade effects of the lower pound. Such criticisms were badly misplaced. By boosting profit margins on export sales, industry sowed the seeds of sustained export revival.
How so? Consider the home market and compare it with export markets. In the former, prices and margins are squeezed by increasingly price-sensitive customers, and competitive pressures are tough to the point of being cut-throat. For the majority of firms, however, it is possible to maintain higher margins in export markets than at home. The post-devaluation response reinforced that position. Therefore, when managers consider where they should deploy resources, export markets have come to look more attractive, in many cases, than those at home.
No flash in the pan
This two-stage response to devaluation has ensured that the effects of a lower pound were no flash in the pan. Unlike every devaluation before it, this one was not followed by a burst of higher inflation, and a sharp increase in the level of wage settlements. True, the price of imported raw materials rose strongly in the immediate aftermath, and again in the summer and autumn of 1994. But firms have been unwilling or unable to pass these increases on to customers. Nor have importers of finished manufactures been in a position to force through the price rises they would have liked to maintain their margins.
To give a personal example, I have a son who is interested in music and he wanted to move on from clarinet to saxophone. When we first considered it, in the winter of 1992-93, the dealer assured me that, because his saxophones were imported, devaluation was about to push up their prices by 15% to 20%. Eighteen months later, when we eventually got round to the purchase, the prices had actually fallen.
A disappearing deficit
The two-stage success of devaluation has, therefore, been due to the fierce anti-inflation environment at home. And, if you are an optimist as I am, this is a success story that can continue. But what about all those articles which concluded that, while UK industry was better and more competitive at what it did, there was not enough of the good stuff to prevent a sizeable current account deficit? Surely this problem has not disappeared.
This is a difficult one, but what I think happened encourages an optimistic view. It is that things were happening which were beginning to eliminate that structural deficit. To give a familiar example: Britain had an annual trade deficit in cars of £6 billion in the late '80s. But inward investment, bringing to Britain output transplanted mainly from Japan, had begun a process of reversing that deficit. Devaluation has speeded the process, and radically improved the position of other sectors where the changes were less obvious. Exporters are entitled to feel proud of themselves.