This double-dip looks like a trade problem

Britain is importing more and exporting less, and that's where the recession stems from.

A lot of people – myself included  – were surprised by the economic contraction announced today. There had been lots of positive noises from the various surveys and data releases since the New Year, and the expectation was for positive (if meagre) growth. Retail spending has increased strongly in the new year, employment has picked up slightly, and the various surveys of businesses all suggested that the economy was growing slightly.

But there was one big problem: trade. It was export growth that propped up the UK economy during 2011 – without exports, the economy would have shrunk by 0.8 per cent over the year. However, UK exports slipped back at the start of 2012, and this may have been enough to tip the economy into recession.

Exports are key to the UK’s economic recovery, because conditions in the domestic economy are so strained. Consumer spending, which underpinned economic growth during the goods years, is being suppressed by falling incomes and stifling household debts. Add in the cuts in public spending, and the banks’ failure to lend money to the real economy, and it’s clear that the domestic economy is unlikely to lead us into recovery. Business investment, another potential route out of the crisis, is being crippled by a lack of confidence and weak demand. The UK economy is caught in a demand trap, and the only easy way out of it is to look overseas.

This export-led approach is at the heart of the government’s economic strategy. The government’s fiscal plan has enabled the Bank of England to keep interest rates low, and pump more money in through quantitative easing. These low interest rates have not been enough to boost consumer spending or investment, but they do have one very helpful side effect – they keep the pound weak, which boosts exports. In principle, this is a decent strategy, but the latest figures suggest it may be unravelling.

The latest ONS trade stats show that the UK’s trade deficit worsened dramatically in January and February, after having improved through 2011. Rather than helping to prop up the economy, trade has started to act as a drag this year, as imports grow and exports shrink. As a result, some of the contraction in the economy came mostly from the production sector, which tends to export more. And perhaps this trade problem shouldn’t come as a surprise, because the pound has been steadily appreciating over recent months. This makes exports more expensive, and imports cheaper – and suggests that the government’s efforts to keep the pound weak are no longer working.

This trade problem may also help to explain how the economy could shrink if retail sales grew. As it turns out, an awful lot of what we buy in the shops is imported, whether its clothes from East Asia or cars from Germany. If the increase in retail spending has helped fuel a rise in imports (or if the imports, such as petrol, have become more expensive), this will not help the economy grow. That isn’t just bad in the short term – it suggests our economy is heading in the wrong direction altogether, and certainly not re-balancing. We will have to hope that this trade problem turns itself around, or it will be even harder to get out of the economic slump.

There is one more point to address: the biggest factor in the GDP contraction was construction. But this should surprise no-one – we already knew that domestic spending was going to be weak, that the government is cutting back investment, and that there are questions over how reliable construction figures are anyway. The problem is that, up until now, these domestic weaknesses have been compensated for by export growth. If that stops being the case, the economy could be in even more trouble, and there will be even more onus on the government to come up with another economic strategy.

Cranes help build the Bishopsgate Tower in London, but construction has fallen flat nationwide. Photograph: Getty Images

Andrew Sissons is a researcher at the Big Innovation Centre based at the Work Foundation.

Photo: Getty
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Theresa May's U-Turn may have just traded one problem for another

The problems of the policy have been moved, not eradicated. 

That didn’t take long. Theresa May has U-Turned on her plan to make people personally liable for the costs of social care until they have just £100,000 worth of assets, including property, left.

As the average home is valued at £317,000, in practice, that meant that most property owners would have to remortgage their house in order to pay for the cost of their social care. That upwards of 75 per cent of baby boomers – the largest group in the UK, both in terms of raw numbers and their higher tendency to vote – own their homes made the proposal politically toxic.

(The political pain is more acute when you remember that, on the whole, the properties owned by the elderly are worth more than those owned by the young. Why? Because most first-time buyers purchase small flats and most retirees are in large family homes.)

The proposal would have meant that while people who in old age fall foul of long-term degenerative illnesses like Alzheimers would in practice face an inheritance tax threshold of £100,000, people who die suddenly would face one of £1m, ten times higher than that paid by those requiring longer-term care. Small wonder the proposal was swiftly dubbed a “dementia tax”.

The Conservatives are now proposing “an absolute limit on the amount people have to pay for their care costs”. The actual amount is TBD, and will be the subject of a consultation should the Tories win the election. May went further, laying out the following guarantees:

“We are proposing the right funding model for social care.  We will make sure nobody has to sell their family home to pay for care.  We will make sure there’s an absolute limit on what people need to pay. And you will never have to go below £100,000 of your savings, so you will always have something to pass on to your family.”

There are a couple of problems here. The proposed policy already had a cap of sorts –on the amount you were allowed to have left over from meeting your own care costs, ie, under £100,000. Although the system – effectively an inheritance tax by lottery – displeased practically everyone and spooked elderly voters, it was at least progressive, in that the lottery was paid by people with assets above £100,000.

Under the new proposal, the lottery remains in place – if you die quickly or don’t require expensive social care, you get to keep all your assets, large or small – but the losers are the poorest pensioners. (Put simply, if there is a cap on costs at £25,000, then people with assets below that in value will see them swallowed up, but people with assets above that value will have them protected.)  That is compounded still further if home-owners are allowed to retain their homes.

So it’s still a dementia tax – it’s just a regressive dementia tax.

It also means that the Conservatives have traded going into the election’s final weeks facing accusations that they will force people to sell their own homes for going into the election facing questions over what a “reasonable” cap on care costs is, and you don’t have to be very imaginative to see how that could cause them trouble.

They’ve U-Turned alright, but they may simply have swerved away from one collision into another.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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