Magazine article Management Today

Europe Casts Shadow over UK

Magazine article Management Today

Europe Casts Shadow over UK

Article excerpt

It is a familiar British summer story. You make all the arrangements, organise refreshments and outdoor activities, an then, just as the guests are arriving, the heavens open. The same could apply to the current state of the economy.

The Government has achieved, through a combination of the accident of Britain's departure from the European exchange rate mechanism (ERM) last year, and the design of deliberate Post-ERM interest rate cuts, a growth-friendly policy. More importantly, it is an export-friendly policy. The low exchange rate and negligible growth in unit labour costs mean that UK industry is more competitive than at any time since 1976 (when the IMF crisis forced the pound down and the recession had started to bear down on wages). Add the partial completion of the single market at the end of 1992, and it should be all systems go.

But, as luck would have it, Continental Europe is in the middle of an economic downpour, which means that Britain's main markets (more than 50% of the export total) are in decline. Germany is the most dramatic example. The official forecast is 1% decline in gross domestic product this year, but most private forecasters think it will be between 1.5 and 2%. This after a boom which saw GDP rise by 5% in 1990 and 3.6% in 1991.

Had Britain had its current competitive exchange rate during Germany's post-unification boom, then British exports could have offset much of the fall in domestic demand, and limited the recession damage. Had we had something close to the present level of interest rates we might not have had a recession at all. But that is another story.

French GDP is set to show a fall of up to 1% this year, Italy around 1.5%. The smaller economies of the Community will either be flat or show small declines. There is better news from Eastern Europe where, after contracting dramatically, countries such as Poland, Hungary and the Czech Republic are set to return to growth this year. As yet, they are not proving to be lucrative markets for exporters.

History warns us that recession in Britain's export markets does not necessarily preclude economic recovery. The short US-led world recession in 1982 did not, for example, prevent Britain's GDP from rising by 1.7% that year, a performance which, if repeated this year, would be regarded by most economists as satisfactory. But in no way was that recovery export-led. …

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