The Eurozone veto could strengthen UK’s emerging market trading

15th December 2011

Certainly the Eurozone, particularly Germany, is among the UK's key trading partners. The US is the largest trading partner at 13%, but Germany is 11.2% and has seen the strongest growth from 2010 to 2011.

There is also no doubt that the UK has been over-reliant on the financial services sector and needs to diversify its export base:

"Warren Buffet, previously warned that the UK's over reliance on its services sector exposed the economy to a higher risk of recession. George Soros has recently said that his concern about the recovery of the UK economy is its dependence on the financial service industry." Sir John Rose, Chief executive of Rolls Royce recently quoted ‘This country needs a broad portfolio of assets. There is an over dependence on financial services. If you are a one-trick pony, you have to hope that people continue to like your trick.'"

As such, Cameron's apparent neglect of the UK's trading relationships in the Eurozone would seem counterproductive. However, there is a question of whether the answer to the diversification of the UK economy lies within Europe.

This Ernst and Young report into the UK export sector puts its relative weakness squarely on its inability to penetrate emerging markets:

"We attribute the poor performance of the past ten years to a combination of a lack of penetration of emerging markets, in particular the BRIC countries, and a loss of competitiveness brought about by a persistently overvalued pound. However, future prospects look more encouraging. Though it lags behind many of its competitors in the developed world, the UK has made some encouraging progress in re-orientating its exports towards emerging markets in recent years. Furthermore, the gain in competitiveness delivered by the steep devaluation of the pound over the past three years will also help UK exporters to gain market share in more traditional markets such as the EU and the US."

The report suggests that financial services and computer & information services are the two export areas that are still growing strongly. This may be worrying for policymakers who want greater diversity, but they may represent an opportunity to open up these difficult markets. Certainly, the BRIC economies and other emerging markets tend to be manufacturing bases because of the relatively low cost of labour and therefore exporting services rather than goods may be more productive.

However, the report also highlights the need to close the productivity gap with Germany. It suggests the UK will need structural reform in education and in encouraging investment.

To this end, the CBI has been lobbying for greater investment in promoting emerging market trade : "John Cridland, CBI director general, said: "The continued crisis in the eurozone underlines just how important it is for the UK to diversify its export efforts to high-growth countries. Given that we're playing catch-up with our competitors, we must act now to target high-growth economies and deliver our growth potential."

Business leaders have also got involved in lobbying the government to encourage better links. This letter to the Times was written by six business leaders, including Martin Sorrell of advertising group WPP and Chris Gibson-Smith, Chairman of the London Stock Exchange:

"If we are to survive as pre-eminent global business hubs, the UK and the US must have strong links to emerging markets such as China, India and Russia. The need for this is urgent – we must have these links now, not in 20 years' time.

The UK's exports are moving in the right direction already. Although many regard the October export figures as anomalous, there are encouraging signs:

"The UK's trade deficit narrowed sharply in October, as the value of exports hit a record high, official figures have shown. Exports of goods rose to a record £26.5bn, while imports fell from September's record £34.6bn to £34.1bn….(there was a) particularly strong rise in exports of chemicals, medical products, and telecoms equipment, the ONS said."

Equally, some companies are doing it for themselves :  "Emerging markets constitute over half of Unilever's revenue (£38 billion last year) with Latin America and Mexico included in the Americas division and growing fast."

Ultimately, Cameron may have accidentally done the UK a favour. In creating a schism with our key trading partners in Europe, he may have hastened a re-orientation of the UK economy. Ultimately, in the long-term, the UK's export market may live or die by its strength in emerging markets, rather than by its relationships in the Eurozone.

More on Mindful Money

Is Britain wealthier than Germany?

Why are stock markets buoyant amidst Eurozone chaos?

Front Page: UK faces £30bn EU bailout bill

To receive our free email newsletter sign up here.


1 thought on “The Eurozone veto could strengthen UK’s emerging market trading”

  1. David Lilley says:

    I often espouse that Mervin King’s “nice decade”, 1997-2007, would be better described as the “debt decade” and that the debt decade led to consequences in the form of the financial crisis and the credit crunch.

    Debt is where you go when you cannot make ends meet. It is bringing forward future earnings and spending them today. If the deficits in the West were due to profligacy we could stop the profligacy tomorrow.

    UK GDP peaked at £1.5t in 2007, as did personal debt (£1.2t of which was mortgages).

    Just looking at a simple, yet conservative, model that excludes corporate and sovereign debt. Assume personal debt rose from 0 to equal to GDP between 1997 and 2007, and that this was linear, it takes GDP from +3% to –7% pa over an entire decade after adjustment for debt. We were spending money that came from home equity release, PFI, mortgages and personal, corporate and sovereign loans in addition to earned income.

    We excited GDP by bringing forward three years of tomorrow’s GDP and spending it in the “debt decade”.

    If we have a decade of leverage it seems obvious to expect a decade of deleverage. A decade in which we must live within our means yet put aside to pay down debt.

    It is five years since the “debt crisis” started to bite in July 2007 and this week Mervin King declared that he expects the gloom to last another five years. Of course I agree with him.

    But at the same time I consider much of the UK state stimulus of 2009, and that contiuning to this day in the US, exacibated the “debt crisis” and it will now take longer to get back to growth.

Leave a Reply

Your email address will not be published. Required fields are marked *