BBC Economics Editor Robert Peston has an interesting post on his blog today on the UK chancellor George Osborne’s visit to China and his attempt to boost exports to the world’s second biggest economy. Apparently Osborne wants China to be the UK’s second biggest export market. Given China’s already vast domestic market, and even vaster potential given its population of 1.3 billion and the scope for incomes to catch up with the richest countries, this aim is to be welcomed.
As I have argued before, the UK’s now sizeable current account deficit (6% of GDP and rising) is a constraint on current and future growth and makes the goal of reducing both public and private sector debt at the same time impossible. If the latter is to be achieved, the UK needs a boom in net exports. At the moment, given the strength of the pound against the euro, the currency of our largest export market, the reverse is happening.
A boom in exports and a move of the UK’s current account towards balance or even surplus (it could happen, given the right policies) would allow domestic production to move into balance or even exceed the sum of consumption and investment/savings. Then the government’s goal of a budget surplus in ‘normal times’ and significant falls in public and private debt as a proportion of GDP could be achieved.
Unfortunately some of this is outside the powers of the UK government. Unless Germany and other countries in Europe such as the Netherlands, which are running substantial current account surpluses, put in place policies to rebalance their economies with a more rapid growth in domestic demand, the potential for the UK to rebalance will be constrained. To their credit, Chinese politicians seem to recognise more than European ones the need for rebalancing, which involves a rising share of consumption and a falling one of savings/investment in GDP. Maybe Osborne’s pitch to China reflects this recognition, but it will be a long haul if Europe continually fails to act in its own and the world’s interests. The signs are not good.