Coming back to trade, I think we still should expect some boost to net trade from the devaluation. In the short-term I think it’s completely understandable for exporters to pocket an additional margin. A big part of that has to be the uncertainty at the moment with demand. With the recession still very fresh in exporters’ minds, they have to be wary about increasing production. Plus increasing production can soon run into capacity limits, particularly if capacity has been reduced during the recession either permanently or in ways that are not easily reversible. So if you’re looking at a big investment to ramp up your productive capacity you want to be sure demand is going to be there to deliver a return.
But putting this uncertainty to the side for a moment, isn’t there an opportunity for our exporters to increase their exports through at least some of that devaluation appearing as lower prices? In the longer term aren’t we made more competitive by a structural shift in the exchange rate? And isn’t that what we’re relying on to boost the UK’s recovery and rebalance the economy?
Maybe, but there are several other things we need to consider. For a start the competitive (or not very) situation facing some exporters. If a lot of firms export similar products then chances are at least some might try to take advantage of a devaluation to capture higher market share by offering lower prices than competitors. How many exporting sectors this would apply to though might be questionable, particularly if many produce highly differentiated products with no real substitutes.
I mentioned above uncertainty on demand perhaps discouraging investment but there could be other barriers to expanding capacity. A really topical one at the moment is access to finance. Some of our recent research and discussions suggest, perhaps not surprisingly firms overwhelmingly favour internal finance – retained earnings mainly – to fund expansion. While expansion can be risky meaning debt finance may not be appropriate there are other forms of external finance that might be. Barriers facing particularly our smaller firms in accessing say, new equity, might be one reason why it might take some time to expand capacity.
What about a deterioration in trade finance, possibly particularly important to fast growing developing economies where trade is commercially riskier. Following the onset of the financial crisis, there was a pretty appalling withdrawal of trade finance and I had heard that while it’s coming back, premiums between countries have spread much more than pre-crisis. Could this be limiting the expansion in exports?
None of this is the full explanation and as per the latest official growth outturn (and our own research), exports do now appear to be gathering momentum at last. But it would be interesting to dig more into the significance of each of these factors…