The Travelex Confidence Index (TCI)1 is an economic barometer for UK international trade, offering a monthly snapshot of UK importers’ and exporters’ views on trading conditions, the UK economy, confidence levels in government support and expectations for future growth. An annual overview of the index offers an insight into how importers and exporters have been affected by the economic and political events of the past year.
Following 13 years under a Labour government, the UK has recently emerged from its first year under the coalition’s efforts to reform the nation amid ongoing financial crisis and reduce its deficit.
During this time, we have seen the trade deficit for goods and services widen to a high of £4.8bn in December 20102 and narrow to a low of £2.4bn in February of this year3. Like most UK businesses, those that trade internationally have struggled to improve their bottom line. And despite government-funded programmes, such as project merlin, exporters are finding it harder to secure capital to support their businesses compared to last year. With that in mind, has the coalition done enough to drive an export-led recovery?
A Month-on-Month Overview of a Year Under the Coalition
The past year of ‘coalition’ has been shrouded in both political and economic uncertainty. Whether it was the fear of a double dip recession, the impact of spending cuts, the impact of the US economic slowdown, UK austerity measures, the Emergency Budget, the European Central Bank (ECB) rate hike of April 2011, or the current European debt crisis, every economic hurdle has impacted the confidence levels of UK businesses trading internationally.
Looking back to the beginning of the coalition’s first term, in May 2010, exporters were initially confident that they could drive an export-led recovery, citing the weaker pound as a source of strength in the months ahead. The Chartered Institute of Purchasing and Supply (CIPS) recorded export trade activity at 58 in May 20104 (anything above 50 signifies growth), representing the eighth consecutive month of expansion and a 16-year high. CIPS also put this down to the weak sterling exchange rate driving export demand. Although exporters were still aware of the possibility of a double dip, 67% were confident in international trading conditions. The TCI rose two points to 103 in May.
In June, Osborne’s fiscal tightening was blamed for damaging growth momentum and business confidence dropped a point to 102. The ongoing European debt crisis was also blamed for stamping out overseas demand. However, the government’s pledge to ‘encourage investment and exports as a route to a more balanced economy5, through backing new enterprises and small businesses, led to 80% of businesses feeling confident that their international trade activity would not be adversely affected by the weak UK economy.
July saw a six point recovery in confidence to 108, with government policies injecting confidence in UK businesses trading internationally. A positive growth figure for the second quarter of 2010 also aided business confidence. After it was announced that gross domestic product (GDP) had risen 1.2% in the second quarter6, exceeding economists’ predictions of 0.6%, the TCI recorded a 45% increase in the number of businesses feeling confident in the UK economy. However, volatility in confidence still remained due to looming austerity measures and the fluctuating pound.
Every month UK exporters and importers are asked whether the health of the UK economy has improved, stayed the same or worsened over the last six months. August showed an uptick to 78% of businesses feeling that economic conditions had either improved or remained stable. Half of the businesses questioned were also in support of the coalitions’ international trade policies, the highest recorded since the Index began, pushing the overall index up to 111.
Confidence dipped again in September when the coalition announced plans to cut spending by 25% over four years7. This led to a seven point drop in the overall index to 104. Sixty-three percent of exporters felt that spending cuts would threaten UK industry over the long-term.
Although spending cuts were causing a rift, importers and exporters thought of them a “necessary evil” in October – an immediate pain but essential for a long-term reduction in the UK’s deficit. The number of businesses concerned about the impact of spending cuts and tax hikes reduced following the Chancellor’s Spending Review8. The index remained stable at 104 in October.
Following their bullish trade forecasts for 20119, the Office for Budget Responsibility (OBR) encouraged an eight point confidence uptick in November and confidence in the UK economy hit a three month high (64%). The coalition’s trade mission to China10 to support exporting businesses through innovation and resource pushed traders’ confidence in international trade growth up 6% to 68%.
December divided importers and exporters in terms of confidence levels and the Index fell six points to 106. Exporters showed confidence in driving economic growth forward, with 65% optimistic their export activity would increase over the year ahead. Importers showed concern about the impact the VAT hike would have on consumer spending in the UK, leading to a 15% fall in confidence and a lag on the index as a whole. The Centre of Retail Research (CRR) projected that consumer spending would decline following the VAT hike by 0.5% in the first quarter of 2011, causing retail sales to plummet by up to £2.2bn11.
The New Year, and in particular February 2011, was beset with double dip rumours, following the announcement of the widest deficit on record12. Business confidence in the coalition tumbled, with 45% of importers and exporters fearing the imminent March budget would negatively impact their business. The index fell a further five points to 101. Importers’ confidence in the UK economy slumped to an all time low with sluggish consumer demand.
Although rising fuel costs and staff wage demands were still an issue, the ‘Budget for Business’ surfaced in March13 and created the first uptick in confidence since November 2010 (to 103). However, with inflation continuing to rise, 60% of businesses trading internationally believed that a further rise in inflation would negatively impact British competitiveness overseas, putting ‘Growth Britain’ in danger.
To complete our year in view, May’s confidence levels ticked up a further five points to 111. International trade conditions emerged as one of the strongest displays on record (74%), with 68% confident that trading conditions will improve over the next year and 73% expecting to see growth in global trade over the next six to 12 months. However, businesses said that securing credit was proving difficult with May seeing a 128% rise in exporters finding it harder to find credit compared to the year prior – a sign that Project Merlin14 has not delivered on lending targets.
Has the Government Done enough to Support the Promised Export-led Recovery?
Project Merlin, introduced in February 2011, is a government scheme designed to encourage lending to small businesses. Despite this, May 2011 saw an unprecedented 128% increase in the number of exporters finding it difficult to obtain credit, in comparison to 2010. The findings of the Index suggest that Merlin is not delivering against its objectives. Clearly, the government should be doing more to encourage lending to businesses trading internationally, as the future of ‘Growth Britain’ rests on their shoulders.
‘Made in Britain’ Blocked by European Downfall
In January 2011, Bank of England (BOE) Governor Mervyn King announced that “the UK economy is well-placed to return to sustained, balanced growth and reassured that “the right course has been set”15. However, with recent events unfolding in Portugal, Greece and Italy, King warned in June that “small businesses will bear the brunt of the crisis”. Does this include UK exporters?
Europe is the UK’s largest trading partner and default threats seem to be spreading like wild fire across the continent. As a result, demand overseas has dropped for products ‘Made in Britain’. In addition, soaring inflation is squeezing profit margins and forcing price increases, making British goods even less competitive. As one importer taking part in the TCI recently said: “Everything is getting more expensive, for instance – product material, fuel – it’s making it very hard to compete against the Far East.”
Clearly, despite the export-led recovery scenario being championed by King, David Cameron and George Osborne, Britain’s exporters are hamstrung by economic events outside of their control. The weak pound appears to have been marginally beneficial, but certainly not to the extent that was expected. The fact remains that for all policymakers have put into the economy, the returns, as yet, have been minor and growth remains weak. There is clearly a long way to go before a full recovery can truly be said to have happened.
1The Travelex Confidence Index has been running since March 2010 and is released monthly in partnership with TNS-RI.
2Office of National Statistics, December 2010 UK Trade.
3Office of National Statistics, February 2011 UK Trade.
4The Chartered Institute of Purchasing and Supply, Activity Index May 2010.
5HM Treasury, UK Economy, ‘The Plan for Growth’.
6Office of National Statistics, GDP Growth 2Q10.
7The Budget 2010.
8Spending Review, October 2010.
9The Office for Budget Responsibility, Economic and Fiscal Outlook, November 2010.
10UK Trade & Investment, Biggest ever UK trade mission to China.
11The Centre of Retail Research.
12Office of National Statistics, February 2011 UK Trade.
13The Budget, 2011.
14Bank of England, Trends in Lending, Project Merlin.
15Bank of England, Mervyn King Speech, 25 January 2011.
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