Driving our way out of recession?

Ministers are desperate for an export-led recovery, but despite improving trade, we're not there yet

Forty years ago it was said that Britain's economic problem, or one of them, was that trade was too closely tied to the old Empire and Commonwealth territories, many of them stagnant, and too little was geared to the go-go economies of the European Economic Community.

During the era of the Wirtschaftswunder and French dirigisme that was a sound argument, and being locked out of the EEC contributed to the UK expanding at about half the rate of Italy, France or Germany. Hence the repeated efforts to get the UK into Europe, final success arriving in 1973.

Fast forward to today and the position can be said to have precisely reversed. Now it is the fast-growing nations that were formerly coloured pink on maps of the world that are growing rapidly, and the eurozone that is in the doldrums. Contrast the robust, dynamic and rapidly expanding economies of Australia, India and Hong Kong with sickly Greece, Spain and Portugal and the point is made admirably.

And one of the main reasons why the depreciation of sterling of 20 per cent since 2007 has not had a more fundamental impact on the UK's trading performance and overall growth is indeed because the eurozone accounts for about a half of British trade.

The EU is now, arguably, a source of strategic weakness. Some 5 per cent of UK exports go to the economic powerhouse that is modern China, growing at 10 per cent plus a year; but three times that proportion goes to the troubled eurozone periphery, which will be lucky not to see any rise in GDP for years. Busted Ireland takes five times the volume of exports from the UK as resurgent India (£23.7bn vs £4.6bn). And so on.

As the charts show, nations such as China and India have become more important in the last decade. Taking exports and imports together, India actually overtook Japan last year, while China (including Hong Kong) briefly overtook France in 2008. But even though they have been growing so quickly, they do so from a low base. In a more extreme form, that is growing even faster but from an even smaller base and smaller in absolute terms, come economies such as Turkey, Israel and Mexico, the next wave of emerging nations, after the Brics. The worrying feature is that Britain has seen little of the action, and certainly nothing like the boom that the German machine tool industry has enjoyed. Keen as it is on the European project, Germany has not neglected other outlets for her goods.

The real problem is that the traffic with the new economies is so one-way. The UK's current account deficit with China (including Hong Kong) was £20bn last year, dwarfing the next ranked nations of Norway (£12.7bn, mainly oil and gas); Germany (£12.2bn) and France (£6.5bn). While not as significant or as pronounced as the US deficit with China ($227bn in 2009) the UK's deficit is, in proportion to national income, about as large, and forms our own local version of the global imbalances.

The latest trade figures, which show a modest improvement in the UK's record, bear out these trends. In fact the June trade figures marked a minor landmark, in that the value of trade imports from the non-EU world exceeded those from the 27 nations of the EU for the first time – £15bn vs £14.8bn.

The EU remains by far the UK's most valuable export market – £11.7bn in June alone – but the growth and the improvement in the UK's trade position is coming from outside the EU, and in particular the US. The trade in goods and services improved to £3.3bn in June, from £3.8bn in May. Most of that amelioration was contributed by goods rather than services, which were flat.

So what have the Americans and Chinese been buying from the UK with such enthusiasm? The answer would appear to be pharmaceuticals and cars, usually luxury ones. The ending of the Treasury's scrappage scheme helped the trade in cars to improve by £183m in the second quarter, compared to the first, when the £2,000 subsidy scheme was still operational. The figure proves the argument put forward by some commentators at the time that, whatever the benefits to the UK retail garage trade, the fact that about 90 per cent of scrappage registrations were imports meant a huge outflow of spending power to other countries.

It was perhaps no shock to learn last autumn that the best-selling scrappage product was a vehicle made in India by a South Korean firm: the little Hyundai i10.

By contrast, the marked improvement in motor exports in the second quarter, of an extra £464m, seems to be a genuine product-led recovery and based on some highly successful new British models, including the Jaguar XF and XJ, Bentley Mulsanne, Land Rover Discovery, Aston Martin Rapide, fresh variants of the Mini, a new Vauxhall Astra and the Rolls-Royce Ghost.

The British motor industry, far from being the moribund drain on the taxpayer that it is sometimes portrayed, is in fact driving the much-vaunted rebalancing of the British economy – with a net extra contribution of £647m to GDP in the second quarter alone. A long hard look at the trade numbers may persuade ministers such as Vince Cable that rhetoric about blank cheques may be a little misplaced.

The other British success story in recent months is the pharmaceutical chemicals sectors, again largely linked to US trade. This sector contributed a respectable £221m extra, and the gain appears to be based on making pills and potions for US and Chinese customers from raw materials and semi-finished items sourced from China.

Overall, the second quarter's UK trade performance added to GDP growth for the first time in four quarters, though some is a bounce-back from the poor weather at the start of the year. Many exporters also seem to be taking the benefit of the depreciation in sterling through improved profit margins through maintaining their foreign currency pricing, rather than cutting it to boost output volumes and employment.

But again the point bears repeating: comparatively little demand is coming from the rest of Europe. Longer term, the trend and the potential also seems clear. Trade with our 26 EU partners is down about a quarter from pre-crisis levels, but, despite the general collapse in world trade in 2009, trade with the non-EU world is still up 10 per cent.

Small wonder so many ministers, led by David Cameron, went on that trade mission to India last month. If the UK can export more to the Brics and the new "Civets" (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa), the monthly trade figures may turn out to be the best, and possibly the only, regularly good economic news in the years ahead.