Labour costs are still too high for export success despite a drop in real earnings, the Bank of England has warned.
Falling productivity and sluggish output are cancelling out ‘unusually weak’ pay growth, putting up the price of UK goods and services in foreign markets.
Adding to the poor trade picture, according to the Bank, is declining demand for the City’s financial services, exports of which plunged 2.8 per cent in each of the first three quarters of last year, against average quarterly growth of 4.8 per cent between 2004 and 2007.
‘The UK economy needs to rebalance away from domestic demand and towards exports,’ the Bank said in its latest quarterly inflation report last week.
‘The sharp depreciation of sterling in 2007 and 2008 should have helped this process. But, despite this and a recovery in world trade, exports have grown only 0.4 per cent a quarter on average since the start of 2009, compared with average growth of just over one per cent in the ten years prior to the crisis.’
The Bank has suggested that some exporters have used the pound’s decline to pocket bigger profits on their sales abroad, and repeated this last week.
But it also produced figures showing a rise of more than 20 per cent since the start of 2009 in the effect of labour costs on export prices.
Regarding exports of financial services, the Bank hinted that the riskier products in which the City specialised were less in demand than they were before the crisis.
It said: ‘Demand for financial products has fallen internationally as risk aversion has risen. But it seems that the UK has been disproportionately affected.’
Global imports of financial services in the Continent and the United States – our biggest markets – ‘have held up rather better than UK financial services exports’. The Bank added: ‘This could reflect lower demand for British financial services in general, or a particularly sharp fall in demand for those financial products in which the UK specialised prior to the crisis.’
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