Expect our TV screens to see waves of red when it comes to the news just now. Not Monday’s goalless battle between Liverpool and Arsenal, but rather the tumbling value of the FTSE and other market indices. The value of stock markets is falling around the world, and all roads lead to one explanation: China.
The Chinese government seems to have decided that it will have to let its markets correct. As an economy in transition, there is an ongoing internal battle within China – about which it can be difficult to know much for sure, due to the closed nature of that country – with regards to how far to control and dictate to the Chinese economy, or how much to allow open trade.
The lack of an immediate response from Beijing to the falling value of their stock market implies that they may have decided to stop inflating their market. Either that or they have run out of policy options to stop the fall.
But what impact could this have on us, if any?
First, our manufacturing exporters. Now we might guess at first glance that there would be a limited impact from the Chinese collapse: Santander says just £13.9billion of our exports go there.
But on the other hand, it is our sixth biggest export market. And a broader consequence of this could be a relative increase in the value of our currency in comparison to others, especially emerging markets. As such, sterling increasing in value is not great for exports. Especially not off the back of a very difficult picture in the eurozone, with our goods exports to EU countries having fallen by 5.3 per cent since 2008.
This matters to the one in 10 people who work directly in manufacturing in my region, the North West. And it risks the Chancellor’s northern economic plans hitting the buffers just like his cancelled rail investment schemes. Not good.
George Osborne promised an export-led recovery. The eurozone has hampered this, and we should all be concerned that his pledges don’t become yet more hot air.
Secondly, if tougher times do lie ahead, we need to be ready.
Our innovation – or our ability to invent new ways of making more out of less resource – is an area where the UK should be leading the world, and helping us to make it through. With our world class universities and research facilities this is an area where the UK has a serious competitive advantage. But whilst we are good at inventing things, we tend to be worse at actually developing those ideas and turning them into products we can sell to the rest of the world.
Rapid improvement in this area is needed if the UK is to get anywhere close to the Government’s £1trillion export target, especially if there are strong headwinds.
Meanwhile, the prolonged period of productivity stagnation in the wake of the financial crisis continues to cast a shadow over the UK economy. Productivity remains 1.7 per cent below the pre-crisis peak.
This structural weakness is fundamentally undermining the long-term growth of the economy and having an immediate impact of wage growth and standards of living.
A strategy to raise productivity is ultimately going to have to be based around a renewed focus on skills, including a big increase in the number of level 3 apprentices, as well as delivery of new infrastructure projects such as HS2 and Heathrow.
Further, whatever the direct impact on Europe, as we have discovered with regards to the ongoing migration crisis, what happens in the developing world has consequences for us.
Various African nations are oil producers, and many more depend on the value of commodities to get by. Prices have tumbled and this will eat into resources available for scarce public services – schools and hospitals – that are vital for development.
Secondly, China has increased its economic influence in both emerging Asian and African markets. There is a good deal of trade between China and these countries, but also – and crucially – there is the investment by the Chinese into infrastructure and other necessary development projects. If this dries up, it could slow the growth of previously very poor countries.
In the end though, when it comes to the UK itself, how well we are able to respond to this market turbulence depends on the efficacy of what economists would refer to as the real economy. In other words, the fundamental drivers of growth in increasing the value of all that is made, bought or sold.
The point is that credible economic management is not simply a case of the right spending and living within our means, it must also be about building a more robust and dynamic economy that is able to weather global financial storms, and give all a decent life.
Slow export growth and flat-lining productivity leave the UK economy vulnerable to external shocks such as what is happening in China. The red lines of doom on the TV should be a wake-up call to the Chancellor, he needs to act sooner rather than later.
Alison McGovern is shadow treasury minister and MP for Wirral South.