In the first year of the financial crisis the pound fell further against other currencies than it crashed during Black Wednesday in 1992. It plunged almost twice as much as in the official 1967 devaluation. Yet despite sterling’s decline, exports have been slow to increase. Only now, six years after the start of the financial crisis, are signs emerging that sales overseas are rising, helped by the cheaper prices resulting from the lower foreign-exchange rate.
Stephen Gifford, director of economics at the CBI, representing Britain’s big business, says: “Domestic and export orders have rebounded almost across the board and manufacturers expect this strength to continue.”
Official trade figures released in August showed that a record £27bn of goods had been sold in a single month, with the growth coming from sales to emerging markets rather than from the traditional Continental customer-base. Rachel Pettigrew, senior economist at the EEF, the manufacturers’ trade body, says: “While exports to Europe have remained stable, exports grew to their highest level in August on the back of strength in sales to non EU-countries, with exports to countries beyond Europe exceeding £14bn for the first time. The positive data supports our view that the manufacturing sector will gain momentum and will be a source of growth for the economy over the coming years.”
Exports can be are important for companies. They mean additional sales when increasing share of the home market can be difficult. They diversify the customer base, giving a revenue source from markets than move in a different cycle to the UK’s. And the extra volume allows fixed costs to be spread over a wider base.
And exports are important to the country. They not only generate the foreign currency that pays for imports – including food and fuel as well as luxuries and components that go into goods that are subsequently exported. Overseas sales also provide the added value that gives a country real growth. Production for domestic markets is part of a closed economic loop in which money simply circulates between factories, workers, services and shops in the same country: exports bring in new money from outside that adds to adds to national wealth. Imports are a negative force, of course, and other countries are all trying to enlarge their economies by selling goods into external markets. Exporting is tough, therefore.
The sharp fall in sterling against the currencies of Britain’s trading partners in 2007/08 ought to have made exporting easier by making UK goods much cheaper abroad. That fall in the pound partly reflected the poor prospects for an economy that was being plunged into recession because of the financial crisis, but cutting interest rates to very low levels helped depress sterling by making it unattractive for foreign investors to hold. But with Britain’s main trading partners also facing recession and cutting their interest rates, the effect of the devaluation was muted. Europeans could hardly be expected to buy British goods when they were not buying their own. Until 2013, the result seemed to be that companies struggled to maintain the volume of exports but received less for them, while consumers continued to buy imported goods but spent more because the currency collapse made them dearer.
What has changed is that UK firms are eventually making inroads into emerging markets, selling more to countries such as India, China or Brazil. The announcement by the new Bank of England governor, Mark Carney, that interest rates should not increase before 2016 has also encouraged exporters and their overseas customers that the pound ought to remain low for an extended period, meaning that Britain goods will retain their price advantage. But most importantly, world trade is expanding again after years in which the global recessions encouraged protectionist measures to discourage imports. Growth in the main emerging-market countries is falling sharply, but it remains positive and – even with China’s growth down to 7 per cent and India’s below 5 per cent - the opening up of these economies means that export opportunities are expanding much faster than the slowing economies. And developed markets, especially Europe, are eventually emerging from recession and able to buy again.
But while the public accounts benefit from increased exports, the effort comes largely from the private sector. It is the army of sales representatives and agencies at UK companies that take on the risks and complexities of selling abroad that produce those sales to overseas markets. A survey by the CBI of nearly 400 UK manufacturers reveals a new optimism that is reflected in the improvement in the wider UK economy. While domestic orders are showing their strongest growth for a year, according to the survey, export orders are growing at their fastest for more than two years.
Economist Stephen Gifford warns that companies remain wary, however. “Optimism in the sector has risen again and demand conditions are expected to improve further. The gentle rise in confidence is being reflected in firms’ headcounts, which are rising at the fastest rate in a year. But manufacturers remain concerned about political and economic conditions abroad limiting export orders, which is likely to reflect highlighted uncertainty over the global economic outlook.”
Indeed, the improvement in exports is relative. While the number of firms telling the CBI that domestic orders are improving was 13 percentage points above the number still reporting falls, for exports the balance was only 9 per cent. And although a record amount of goods are being exported, imports are rising too and still exceed overseas sales by about 30 per cent. The UK has not had a monthly balance of payments surplus on trade for two decades and the annual trade gap is running at £100bn a year. The surplus on exports of UK services – which are in no way inferior to selling goods abroad – only partly offsets the trade deficit. The difference has to be made up by borrowing from abroad to obtain foreign currency, or by selling UK assets. A steady stream of UK companies has been bought by foreign corporations in recent years, with the proceeds financing Britain’s trade gap.
Not surprisingly, a government already trying to reduce debt is keen to minimise that gap between export sales and import costs. David Godley has this autumn become chief executive of UK Export Finance, the body that supports private-sector exporters. Godfrey was already a part-time director of the body but worked full time as head of risk at Lloyds Banking Group and before that was at Swiss Reinsurance. “My experience of working with UK Export Finance as a non-executive director means that I am already aware of the issues facing the export community and I am committed to ensuring that all exporters are aware of the support we can offer,” he says.
Government support also comes through UK Trade & Investment, an agency jointly reporting to the Treasury and Department of Business. From autumn 2013 it is undertaking its largest ever series of trade missions to emerging markets. The ‘Great Weeks’ showcases for UK firms will promote British manufacturers of luxury goods, food and drink plus the retail and creative sectors in markets such as Vietnam, Japan, Mexico, Russia, Brazil, the United Arab Emirates, Hong Kong and Macao in a programme lasting into 2014.
Trade minister Lord Green, himself a former banker, says: “Increasing the number of UK businesses who sell overseas is a fundamental building block of the government’s plan for growth. Worldwide, there is a growing appetite and appreciation for British goods and services and awareness of Brand GB remains very high following the success of London 2012 and the Queen’s Diamond Jubilee. The Great Weeks series is designed to capitalise on this by using UKTI’s global network to put companies in front of potential customers in fast-growing markets.”
Exporting remains tough, but at last Britain’s companies are succeeding in gain sales abroad. But while the UK government can help, it is the strength of foreign economies that will create the demand for goods. British firms have to ensure they can satisfy that demand by having manufacturing capacity and prices and productivity that matches not just companies in the local markets but in all the other countries seeking to export there.
Richard Northedge is Commissioning and Consulting Editor of Director of Finance.