Faltering UK recovery would spell trouble for Irish exporters

 

ANALYSIS:Fears in Britain of a double-dip recession may have faded, but recent data is not all that reassuring

THE UK economy shrank in the final three months of last year, inflation is rising, retailers are worried by falling, or stagnant sales; mortgage lending has collapsed to levels not seen for a decade; yet manufacturing is striding ahead on the back of exports.

Unemployment is falling, yet the number with jobs fell in the last calculation by the largest amount for two years; while the number out of work for more than a year is rising.

Under the Conservative-Liberal Democrat coalition’s plan – one largely designed by the Conservatives and agreed to by the Lib Dems during five days of hurried talks last May – the UK’s coffers would be put to rights over five years with draconian cuts, but growth in the economy would fill the gap.

For months, the strategy of the chancellor of the exchequer, George Osborne, appeared to be working, as fears of a double-dip recession and an attack by international financial speculators on sterling faded away.

The health of the UK economy matters not only to it, but also to Ireland. Last year, Irish-based companies, both Irish and foreign-owned, sold £10.2 billion (€11.9 billion) worth of goods to Britain, while £1.09 billion went across the Border – both marginally up on the year before.

However, figures showing the UK economy shrank in the last quarter of 2010 have badly rattled the confidence of British ministers, leaving them open to charges from Labour that they have done little to encourage growth.

Faced with a fall of half-a-percentage point in the size of the economy, Osborne laid some of the blame at the door of the foul weather that crippled the country during December. The snow did contribute, undoubtedly, but Osborne was derided for using it as an excuse.

Describing the figures as stunningly anaemic, some economic forecasters point to even worse problems in 2011 unless inflation, now running at 3.7 per cent, well above the 2 per cent target set by the Bank of England, can be reined back.

However, the prospects for so doing are slim: higher VAT rates came into force from January, while galloping commodity prices will continue to influence the figures in the months ahead.

Bank of England governor Mervyn King is faced with difficult choices as pressure grows for an interest rate rise to curb inflation. But if one were implemented it could choke the signs of economic growth. The bank’s base rate has remained at 0.5 per cent since March 2009.

While manufacturing orders are growing fast, the sector accounts for just 13 per cent of the UK economy. Services are more crucial. Here, the evidence is more mixed. Revised figures for the last quarter of 2010 showed that services suffered sharply.

Since its election, the coalition government has repeatedly highlighted the fact that Ireland is the UK’s second-largest export market – larger that China, India, Brazil and Russia combined.

From an Irish point of view, the narrative put forward by Osborne and Cameron had the benefit of ensuring public and political support for Osborne’s decision to offer a £7 billion loan to Ireland.

However, neither Osborne nor Cameron meant it as a compliment, but rather to illustrate the failure of British exporters to tap into emerging markets – one that they are determined to rectify.

Faced with the need to show action on growth, Liberal Democrat minister Vince Cable yesterday produced a White Paper designed to encourage British small and medium firms to “go East” to tap into China and India.

Export credit guarantees, largely confined to major British firms, will be opened up to smaller companies, while the government’s trade promotions arm, UK Trade & Investments, will be “refocused” on emerging markets.

However, export battles are hard fought.Deputy prime minister Nick Clegg warned that there are no magic levers that can be pulled by Whitehall. Instead, slow, deliberate actions are needed to move the UK economy away from foundations built on debt.

However, voters demand quickly pulled levers. For months, the coalition’s confidence was high, as statistics broadly told the story that ministers both wanted to hear and to tell. That confidence has now been dented. Opinion poll ratings are falling sharply as a result.


Mark Hennessy is London Editor