Trade gap shows we're still playing with fire

The managing director of the IMF should be a drab economist who actively courts unpopularity, delivering unwelcome fiscal truths to countries big and small. This is an honourable and necessary job, requiring someone with deep technical knowledge and nursing no ambition of elected office.

Lagarde, in contrast, has used her IMF perch publicly to undermine attempted fiscal retrenchment, while urging the European Central Bank to overcome German sensitivities and overtly join the “ugly contest” by conducting no-holds-barred currency debasement. All this no doubt plays well not only with her native electorate but also with Europe’s banking lobby (a useful source of funds in any future election). Through her populist rhetoric and failure to give developing countries a bigger voice, Lagarde has damaged the IMF. Future historians will judge her harshly.

Having said all that, despite more encouraging growth numbers and Osborne’s IMF-baiting, the UK economy isn’t out of the woods. Recent data aside, Britain has performed badly since the 2008 global financial crisis.

Our gross domestic product remains some 1.4pc below its pre-Lehman peak, making us almost unique among the world’s advanced economies in having not yet fully recovered from the sub-prime collapse.

Manufacturing output is 8.9pc below its pre-crisis level. Industrial production overall is still 12.1pc adrift. Construction output, too, is 12.5pc lower than it was back in 2007 – astonishing, given the crucial role this sub-sector has played in previous UK recoveries.

Why is it, for instance, that fewer than 110,000 new homes were built last year, a 5pc fall on 2012 and among the lowest peace-time totals in a century? Forget the “record housing start” numbers spun by ministers and the housebuilding lobby – both with an interest in prolonging our disgraceful housing scarcity, so maintaining an upward price spiral. Just breaking ground constitutes a “housing start” – it’s completions that matter. The rising number of British households, hard-wired into our demography, means that we need at least 250,000 new homes a year, more than double the current total.

Rather than enduring the brickbats of more builder-friendly planning or forcing developers to stop land-banking by levying meaningful fines, ministers have introduced, then extended, the dangerous Help to Buy mortgage guarantee scheme.

By promoting demand, with little extra supply, this has stoked up prices even more, generating a temporary feel-good factor for home-owners and banks nursing ill-judged property loans but blowing another dangerous bubble, too. Housing, meanwhile, becomes even more unaffordable for a generation of youngsters who feel, understandably, destined never to own.

This move to boost house prices, while failing to address the underlying problem of an inadequate housing stock, is symbolic of the UK’s unbalanced recovery. The latest figures show capital investment up 2.4pc on the previous quarter. But such investment remains little more than 12pc of GDP, compared to 18pc-20pc in the US and Germany. And despite our perhaps unmatched trading heritage and international contacts, Britain’s external sector continues to act as a net drag on the economy.

Trade data attracts little media scrutiny. Yet it’s surely noteworthy that the UK’s current account deficit – our imbalance of imports over exports, plus net gains on overseas investments – was a stonking £22.4bn during the fourth quarter of 2013. That’s 5.4pc of GDP, only marginally down from 5.6pc the quarter before. As a share of our national economy, these are the largest two external deficits in British history. That sits uncomfortably with claims the Government is rebalancing our economy away from domestic consumption and debt and towards exports and investment.

The UK trade deficit narrowed slightly in February. A £7bn monthly surplus in services imports (including financial services) was offset by a massive £9.1bn shortfall of goods exports. That resulted in a £2.1bn trade deficit overall, marginally down from £2.2bn the month before. This slight improvement, though, was due to slower imports, not higher exports.

We exported just £23.6bn of goods in February, the lowest total since November 2010 despite “world-beating growth”. The UK’s current account deficit is expected to hit £6.5bn over the first quarter of 2014. So, yet again, our trading sector will undermine the broader economy.

The UK’s largest trading partner remains the eurozone, of course, which remains in the doldrums and will struggle to expand by 1pc this year. Yet Germany still managed to chalk up a massive current account surplus in 2013, no less than 7.5pc of GDP, not least due to extensive trade with emerging economies.

German exports to these mass markets of tomorrow last year totalled no less than 14pc of its GDP. The UK equivalent was just 4pc, highlighting our failure to secure the market share necessary to ensure the prosperity of our children and grandchildren.

While Osborne is entitled to goad the IMF, and deserves credit for seeing off his critics, he should be careful to avoid hyperbole. The Chancellor told those gathered in Washington that healthier banks and a credible plan to fix public finances are essential to securing growth. “In the UK,” he said, “these conditions are in place”.

If only. Britain’s banking sector remains bloated, with “too big to fail” now even more of a danger than in the run-up to the Lehman collapse. And for all Osborne’s talk of “austerity” and the faux outrage of Lagarde and other deluded, grandstanding Keynesians, our national debt is set to reach £1,600bn by 2018, twice as big as when Osborne took office in 2010.

By relying on quantitative easing, ever more state borrowing and busted banks, the UK, like most other large Western economies, is “playing with fire” as much as ever it was. The only difference is that, as usual, we’ve juiced-up our housing market in time for a general election. Underneath the hype, as the trade numbers show, sustainable recovery remains elusive.

Follow Liam on Twitter @liamhalligan

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