The wrong kind of rebalancing

It's good news that the trade deficit has narrowed. But if the reason for that is because imports have collapsed, the figures may not be so cheering after all

For policymakers who have been eagerly awaiting a "rebalancing" of the UK economy for at least five years now, it's welcome news that our trade gap with the rest of the world narrowed to �1.1bn in December ? the smallest deficit since 2003. Given the tough international climate, that looks impressive.

Together with news that manufacturing output was stronger than expected in December, the narrowing trade gap has prompted a flurry of hopeful speculation about the green shoots of recovery.

But we should be cautious about celebrating an economic renaissance just yet. Although exports have risen, much of the improvement in the UK's trading position in December came through a collapse in imports.

As retailers' performance over the crucial Christmas trading period made clear, Britain's consumers have responded to the rising cost of living and the prospect of drastic public spending cuts by penny-pinching hard.

While exports of goods were up by just 0.9% in December, imports fell by a much sharper 4.6%.

Unfortunately, this is just the wrong kind of rebalancing: if the trade gap is narrowing because consumer demand is collapsing at home, it's a sign of weakness, not strength. It doesn't augur well for the UK's growth prospects if, as many analysts expect, world trade growth stalls in the coming months.

Inflation has started to decline, which could help to ease the pressure on households' balance sheets, and at next week's inflation report briefing, Sir Mervyn King is likely to repeat his suggestion that the squeeze should ease in 2012.

But that's unlikely to release a surge of pent-up demand when wage settlements are weak, unemployment is rising, house prices are stagnating and the vast majority of public spending cuts have yet to come. But the fact that the Bank's monetary policy committee has extended quantitative easing by another �50bn underlines their continued anxiety about the underlying strength of the economy.

Much is riding on the fortunes of Britain's plucky exporters; but with the eurozone crisis far from over, the trading environment is likely to be extremely tough. Don't expect those green shoots to burst into leaf any time soon.

• Economic growth (GDP)
• Green shoots
• Economics

Heather Stewart

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Source: http://www.guardian.co.uk/business/economics-blog/2012/feb/09/wrong-kind-of-rebalancing

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