This week’s poor balance of payments figures for last month revealed two worrying facts. Despite the sharp falls in the pound, there has been no surge in exports to show us gaining market share as we become more price competitive. At the same time, imports have increased sharply as destocking ends, with no sign that UK industry is about to replace imports with home produced goods. Trade volumes both ways are up as the world economy recovers a bit, but there is no encouraging sign that we are about to improve our relative position.
After a decline of almost one quarter in the currency, you would expect both a surge in exports and a lively increase in import substitution. The absence of both so far implies several problems.
First, a lot of capacity was clearly lost in the recession. Factories were closed, people were made redundant. The last twelve years have seen industry decline as a result of high taxes and high regulatory costs.
Second, manufacturers have been finding it difficult to get bank finance for their activities. In need of cash, they have favoured putting prices up in sterling terms, taking advantage of the lower pound to do so. They have been forced to raise their margins on lower volumes given the shortage of finance.
Third, the UK in recent years has lost great swathes of capacity. JCB recently told us how small a proportion of their vehicle components they can now source from the UK. If you go into most clothes shops there are racks and racks of Asian textile products because the UK industry has been cut to the bone. UK steel plant is closing as demand falls.
We need policies that will help industry recover and build new capacity. That requires changes to taxes, regulations, and bank regulation.