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.

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Stability is essential to solve the pension problem

The new chancellor must ensure we have a period of stability for pension policymaking in order for everyone to acclimatise to a new era of personal responsibility in retirement, says 

There was a time when retirement seemed to take care of itself. It was normal to work, retire and then receive the state pension plus a company final salary pension, often a fairly generous figure, which also paid out to a spouse or partner on death.

That normality simply doesn’t exist for most people in 2016. There is much less certainty on what retirement looks like. The genesis of these experiences also starts much earlier. As final salary schemes fall out of favour, the UK is reaching a tipping point where savings in ‘defined contribution’ pension schemes become the most prevalent form of traditional retirement saving.

Saving for a ‘pension’ can mean a multitude of different things and the way your savings are organised can make a big difference to whether or not you are able to do what you planned in your later life – and also how your money is treated once you die.

George Osborne established a place for himself in the canon of personal savings policy through the introduction of ‘freedom and choice’ in pensions in 2015. This changed the rules dramatically, and gave pension income a level of public interest it had never seen before. Effectively the policymakers changed the rules, left the ring and took the ropes with them as we entered a new era of personal responsibility in retirement.

But what difference has that made? Have people changed their plans as a result, and what does 'normal' for retirement income look like now?

Old Mutual Wealth has just released. with YouGov, its third detailed survey of how people in the UK are planning their income needs in retirement. What is becoming clear is that 'normal' looks nothing like it did before. People have adjusted and are operating according to a new normal.

In the new normal, people are reliant on multiple sources of income in retirement, including actively using their home, as more people anticipate downsizing to provide some income. 24 per cent of future retirees have said they would consider releasing value from their home in one way or another.

In the new normal, working beyond your state pension age is no longer seen as drudgery. With increasing longevity, the appeal of keeping busy with work has grown. Almost one-third of future retirees are expecting work to provide some of their income in retirement, with just under half suggesting one of the reasons for doing so would be to maintain social interaction.

The new normal means less binary decision-making. Each choice an individual makes along the way becomes critical, and the answers themselves are less obvious. How do you best invest your savings? Where is the best place for a rainy day fund? How do you want to take income in the future and what happens to your assets when you die?

 An abundance of choices to provide answers to the above questions is good, but too much choice can paralyse decision-making. The new normal requires a plan earlier in life.

All the while, policymakers have continued to give people plenty of things to think about. In the past 12 months alone, the previous chancellor deliberated over whether – and how – to cut pension tax relief for higher earners. The ‘pensions-ISA’ system was mooted as the culmination of a project to hand savers complete control over their retirement savings, while also providing a welcome boost to Treasury coffers in the short term.

During her time as pensions minister, Baroness Altmann voiced her support for the current system of taxing pension income, rather than contributions, indicating a split between the DWP and HM Treasury on the matter. Baroness Altmann’s replacement at the DWP is Richard Harrington. It remains to be seen how much influence he will have and on what side of the camp he sits regarding taxing pensions.

Meanwhile, Philip Hammond has entered the Treasury while our new Prime Minister calls for greater unity. Following a tumultuous time for pensions, a change in tone towards greater unity and cross-department collaboration would be very welcome.

In order for everyone to acclimatise properly to the new normal, the new chancellor should commit to a return to a longer-term, strategic approach to pensions policymaking, enabling all parties, from regulators and providers to customers, to make decisions with confidence that the landscape will not continue to shift as fundamentally as it has in recent times.

Steven Levin is CEO of investment platforms at Old Mutual Wealth.

To view all of Old Mutual Wealth’s retirement reports, visit: products-and-investments/ pensions/pensions2015/