A sword of Damocles is hanging over the British economy. It arises from the unique combination of our accumulated debt levels and our massive trade deficit. This leaves us more vulnerable to the consequences of an external shock, even one far smaller than the 2008 financial crisis. And if anything nearing that scale were to be repeated, we’d be sunk.
Neither the debt level nor the trade deficit would in themselves be fatal. It’s the combination of the two — and the fact that both are worsening — that makes us so vulnerable. And we’re in a far worse situation than other comparable countries.
On the debt front, our accumulated government debt has more than doubled since the 2008 crisis hit us, to over 80% of GDP. While it’s much better than Greece (175%), and slightly better than Spain and France (both around 90%), the exceptional size of international financial services in our economy makes such an accumulation of liabilities more problematic.
All the more so as our private household debt is also very high — its ratio to disposable income is, at 151%, the worst in the EU, ahead of Spain (141%), Greece (109%), Germany (103%) and France (90%). Outside the EU, Japan (131%) comes close. But both Spain and Japan are able to borrow more cheaply than us: Spain because it’s in the euro, and Japan because of its deflationary history. Spain can borrow at 1.22% over ten years, and Japan at 0.33%, compared to our 1.56%. Our debt-service costs are in any event set to rise relative to theirs through to 2017.
This vulnerability is enhanced by our continuing poor trading performance. Whilst Spain is now running a current account surplus of 0.8% of GDP and Japan one of 0.7%, we are running a deficit of 4.4% of GDP, despite the massive devaluation of the pound after the financial crisis (now only partly reversed). There is some respite due to the fall of commodity prices, not least oil, reducing our import costs, but — crucially for the medium and longer term — exports are stagnating.
The CBI said in its March monthly health check that export order books stood at their lowest in more than two years. Only 10% of manufacturers said their export order books were higher than normal for the time of year, against 35% who said they were below normal. The balance of -25 percentage points compares with -8 points in February — a dramatic decline.
On top of that, the CBI industrial trends survey suggests that the economy is now growing less quickly than it was in the second half of 2014. Order books fell from a balance of +10 points in February to +0 in March, while fewer companies said they had expanded output in the past three months and stocks of unsold goods increased. All this is happening despite lower oil prices providing a boost to manufacturers by lowering energy and transport costs.
Not to mention the political uncertainty around May’s general election, the Tory threats to our EU membership and Osborne’s latest plans that mean a tighter squeeze on spending until 2018-2019.
What we need
In combination, all this means:
- we are much more susceptible to overseas investors’ changes of perception about our economic prospects
- in the event of a shock, we couldn’t repeat even half the scale of support we undertook in 2008 to preserve the solvency of our banking system
- health and welfare spending are particularly affected by our ageing population, yet these two plus education make up more than 65% of our budget; given the continued rigidity of public spending, we need a consistent growth rate of at least 2-2.5%
For all these reasons, it’s essential to improve Britain’s export performance. But doing so will require stability and a steady strategic approach. Staging a complete revolution in our external trading relations by leaving the EU would be immensely damaging. But it would also — certainly, immediately — transform the vulnerabilities of our current fiscal and external commercial position into an actual, serious, financial market crisis.
You have been warned: the Tory record, combined with Tory plans, could be fatal.