Trade deficits aren’t, by themselves, an evil thing. Or economically “bad”.
If you’re saving money and have a strong currency, it’s natural that you’d buy cheaper imports. Further, if you have a productive economy that’s growing, you’re going to attract foreign investment. That isn’t “bad” either.
The trouble with trade deficits comes when your consumption of imports is financed by credit expansion, especially when your savings rate is low or in decline. That’s the sign of an economy trying to spend its way to prosperity out of an empty pocket. That’s never going to work.
Is the UK’s trade deficit “good” or “bad”? Let’s look at the figures and some analysis released this morning from Pantheon Macro. It reports the following (emphasis added is mine):
February’s trade figures suggest that the U.K.’s economic recovery remains extremely unbalanced. In January and February combined, the volume of goods exports was 0.6% lower than in Q4, compared to a 1.5% increase in imports over the same period.
As a result, net trade looks set to subtract about 0.4 percentage points from quarter-on-quarter GDP growth in Q1, assuming no erratic movements in March. This would be the third consecutive quarter in which net trade had reduced GDP growth, and we think an improvement still is some way off.
Sterling’s 10% depreciation in trade-weighted terms will ease the pressure on exporters, but the pound remains uncompetitive against most currencies; the real-effective exchange rate is still about 3% above its 25-year average. What’s more, past experience suggests it will take at least a year for sterling’s recent depreciation to support exports.
A “balanced” recovery would include larger exports driven by lower sterling. Pantheon reckons it will take “at least a year” for weaker sterling to lead to stronger exports. But the larger issue is productivity. If you can increase output per person – if fewer people can produce higher value goods and services in the same amount of time – then you’re on to a good thing.
Productivity has been in decline for years. UK statisticians call this the “output gap”. It’s the difference between the British economy’s productive potential and what it’s actually doing. A large debt overhang restrains growth. But it’s also “structural” in the sense that technology isn’t leading to productivity increases the way it used to.
That may all change soon, if Eoin Treacy and Nick O’Connor are right. They’ve argued that the world’s economy is on the verge of a fundamental (and positive) transition to… something totally different. An age of exponential growth.
Category: Economics