Monday, 14 April 2014

Why aren’t the Germans buying from abroad?

In my blog last week, I explored some of the challenges facing our economy as we develop and grow out of recession. One of the key issues is to strengthen our trade performance, and, as in the past, to sell our national products and services boldly on a global platform.

The publication of some trade statistics gives some grounds for optimism on this front: we are doing well in increasing our markets with Italy, Holland, Belgium and many others. Of alarm and concern, however, is our balance of trade with Germany. It seems that, when it comes to the exchange between what are, arguably, the two most powerful economies in Europe, the flow of trade is dis-proportionately one-directional: so why are we buying German goods, but failing to gain any real traction with German markets. We need to examine why it is that the most significant market within the Eurozone is not buying British.

Preliminary investigation suggests that the problem is not the United Kingdom’s alone. Germany is running a colossal trade surplus with most countries in Europe: something which has created concern around the corridors in Brussels. Their focus is on the risk of macro-economic imbalances generating more instability within the Eurozone. Similar anxieties have been expressed in Washington, where it is felt that the Germans have been too sluggish in assisting their European partners out of the economic malaise.

From a European Union perspective, it seems that the course on which the institution is set is legalistic. If Germany’s trade imbalance remains stubbornly high, this will be deemed by the European bureaucracy to be in breach of the ‘macro-imbalance’ rules, and enforcement action (with qualified majority voting) could be taken. I doubt the sense in adopting this response.

Whilst Germany’s reluctance to purchase goods and services from abroad is creating a potential deflationary bias, it cannot be denied that the strength of the German export market is an asset to the country and the Eurozone. As so often with European Union institutions, the obsession with ever-closer union and enforced compliance cloud the most important point. And it is hardly as if Europe is on the brink of a catastrophic deflationary spiral.

No, the challenge is a more obvious one – if somewhat harder to accomplish. We, and the rest of the world, need to work much harder to crack the challenge of German markets. The only reason that they are not buying can be that we are not producing what they want at a price they are prepared to pay. Given our relative strengths in high-level manufacturing, information technology and innovation, I would have considered our compatibility with Germany’s engineering prowess more than compelling.

And whilst the situation with Germany is especially acute, it mirrors the task facing us as a nation genuinely striving to prosper. We need to re-discover our zeal for trade – supplying and selling in world markets as a genuine global player. Germany, it seems, will be a tough nut to crack, and that is why it may take a little more focus than with those countries with whom we have already achieved some progress. But as Europe’s biggest economic players, we both deserve an enhanced economic relationship – and we are the ones to do the catching-up on trade.

Wednesday, 2 April 2014

Recovery is gaining momentum…we must address productivity

One consistent message from economic statistics in recent months is that we are finally starting the journey out of recession. Plainly, the difficult decisions since 2010 have revived a dying patient, and it is good to see that growth is starting to gain momentum.

With the emergency instruments put to one side, it is vital that we look at some of the more significant structural obstacles to our future prosperity. One of the greatest of these is the vexed issue of productivity: something which has troubled our economy well before the economic crash of 2008. Indeed, our productivity per worker has lagged behind our international partners and competitors for a very long time and with hours worked increasing at a rate quicker than GDP growth, the problem is still getting worse. We had the worst productivity in the G8 in 2005, and only Canada and Japan have come close to replicating our disappointing performance.

Productivity stagnation will become a more significant challenge as we achieve the growth that we seek: current levels of unemployment, under-employment and immigration provide some temporary relief, but that cannot be regarded as a long-term resource. We should aspire to a time when growth can only be achieved through improving the efficiency of each hour worked per worker – and in the absence of productivity improvements, the fiscal scenario becomes ever bleaker.

It may be true that the decision of employers to prioritise retention over redundancy during the recession, with pay-restraint as part of the deal, has impacted the calculation to our disadvantage. But it is important that we get to grips with the substantive issue, rather than shift into a debate about how to calculate what is a very clear and emergent phenomenon.

Our recovery needs to broaden into the expansion of business investment and export-led growth. The current situation of a recovery based on domestic consumption should mark only the beginning of a fresh phase of British prosperity.

We need to think very carefully about how we can meet the productivity challenge: we need to find a way of releasing the pots of money stashed away by businesses for future investment. Of the £224 billion gross investment in the UK in 2012, just £48 billion was net new investment – with the remainder offset by capital consumption or depreciation on the retention and replacement of existing assets.

Equally, we cannot be complacent about exports. I commend the Government for putting export growth on the highest possible platform, and the trade delegations and appointment of export champions is to be welcomed. But I doubt that the ambitions of the Prime Minister and the Chancellor have been satisfied with our performance on exports to date. I believe that we have massive unexplored potential in the larger of our small business sector, and the key to our future prosperity can be found in the development of our export markets.

No-one can deny that the Government’s focus on macro-economic stability has been a critical priority throughout the dark days of recession. But as our economy emerges and strengthens progressively, we need to think very carefully about some of the structural weaknesses which made our experience of recession harder and held our prosperity back. That is the real agenda for economic policy in the coming months and years, and I intend to keep up the pressure to ensure it is addressed. Without it, we will continue to under-perform, and that is not without cost.

Thursday, 27 March 2014

The case for accelerating high speed rail is overwhelming

Last week, there was a review which urged the Government to bring forward the benefits which high speed rail will deliver.  Sir David Higgins was right to make the case for speeding up the construction timetable for this vital project – including work on the second phase to take place as we deliver the southern component, completing the whole scheme six years earlier than originally planned. That is why it will be so warmly welcomed in Northampton that the Secretary of State told Parliament earlier this week that the Government is favourably disposed towards what that report contained.

For those who oppose the project, there seems to be no realisation of the need to accommodate capacity for growth. Northampton rail users know only too well how severe the lack of existing capacity is on the West Coast Main Line, and that does nothing to address the challenges which the welcome return to economic growth will present. Nobody can deny that the West Coast Main Line traverses our nation’s most important transport corridor, and we neglect its needs at our own cost.

I believe that the Transport Secretary is correct to draw analogies with the transformational improvement in communications achieved with the original railway revolution of the Victorian era. Doubtless, there were many who found reasons to object to the railway network being developed across the country, but we should be well beyond denying the economic opportunities upon which improved connections depend. It is not unreasonable that those affected by the construction and subsequent existence of the line should be compensated appropriately, but the reality of trying to accommodate growth on the existing network is an unhappy and conflicted one.

As someone intimately involved in delivering substantial regeneration and growth in Northampton, I stand fully behind the Government’s ambition for our transport network. Some of us were not surprised by Lord Mandelson’s admission that his support for the scheme was cynical and politically-driven, but releasing additional capacity to enhance services between Northampton and London will be key to achieving our potential in the town: a view endorsed in Parliament by Labour’s current transport spokesman. Northampton is embracing the growth agenda with both hands, and our railway is a critical part of our future prosperity.

But the key message for me from Sir David Higgins’ report is clear: that there are potential savings in costs to be made by proceeding more swiftly with high speed two. For those who seek to hold up progress – in part because they believe that the costs are excessive – they need to reflect on the opportunity costs of their own actions. The reality is that doing nothing is not an option: and making haste will improve the value for money of the project.

Northampton needs additional rail capacity to support our ambitions: and our country needs additional capacity on our most critical transport corridor. The Government has been cautious and deliberative to date: it’s time to signal the green light and accelerate the delivery of high speed two. It’s not hyperbole to state that our future prosperity is strongly correlated to getting this right.