The Real Barrier to UK Exports is the Lack of Productivity 3
EC2 ECONOMICS CASE STUDY: THE REAL BARRIER TO UK EXPORTS IS THE LACK OFPRODUCTIVITY
TheReal Barrier to UK Exports is the Lack of Productivity
Economic recovery can be defined as a stage in the financial system that follows after a recession. The economy performs better in terms of unemployment as well as achieved output levels as compared to the recession period (Ohlin, 2006). It is basically a phase of increased business activity depicting the end of an economic downturn. Balanced economic recovery can therefore be described as an economy’s revitalization whereby all aspects of it, especially production factors such as labor, land as well as entrepreneurship, recover at a similar rate (Ohlin, 2006). The recovery is shared and sustainable for the long term (Wintour, 2014).
A strong and improved British Pound is favorable and indeed good news to the populace. However, export companies that sell products overseas are likely to suffer losses hence there will be reduced foreign profitability and also the cost of housing will increase. This is from the negative impact on the forex rates when they exchange money from subsidiaries and international customers to sterling pound (Gelis, 2014). For instance, some big companies in the U.K such as IMI (4% decrease) and Pearson (6% decrease) have reported a decrease in profits (Gelis, 2014). Exporters will be the hardest hit and they need to either absorb probable custom loss or lower prices (Strauss, 2014). This will lead to shorter profit margins and those that fail to act now are likely to lose customers in the long run. Conclusively, as much as a strong Sterling pound signifies a stronger economic outlook, it is likely to undermine attempts to rebalance U.K’s economy.
There are pros and cons of a strong British pound. The first benefit is that it increases the purchasing power of UK citizens. Foreign products become less expensive and the populace feels more confident to spend since they feel richer while the price of imported products is cheaper (Lein, 2010). An example is the improvement of the actual buying power of residents when travelling abroad.
Secondly,when the sterling pound is strong inflationary pressures are reducedand therefore inflation is under control. A strong sterling leads tolower prices of import. Domestic companies face stiff competitionfrom international companies that produce cheaper imports and theytherefore have to reduce prices accordingly (Lavelle, 2014). Thetable below explains how inflation is kept under control when the UKPound is strong (Tutor2u, 2014).
Lastly,a strong UK pound will benefit importers. UK businesses that havelarge expenses in foreign currencies will have a decrease in theiroperational costs (Lavelle, 2014). For instance, a UK company thatowes a US company $I Million at an exchange rate of SterlingPound/USD 80 cents, the $1 Million would be valued at 1.25 MillionSterling Pounds.
The fall in the value of the UK pound did not have an effect on United Kingdom’s exports primarily because of UK’s focus on the mature and traditional markets (Carney, 2014). UK’s exports popular destination is the European Union. The UK tends to overlook the fast growing and larger economies of Russia, Brazil, China and India. These fast growing economies are seen by many analysts as the top prospective economies for increasing business opportunities (British Commerce Chambers, 2014). In spite of increase of exports to countries that are not in the EU, the UK remains reliant on EU as a destination for its exports. The continued struggle of the EU financial system is worrying. When the economy is struggling UK exporters also struggle to export more.
Advancements in technology over the past few years have led to competitiveness, consequently prompting businesses to adopt the newest and high tech ways of production (Cask, 2010). When British companies shift their production to more high tech and capital intensive production ways, innovation will be inevitable and quality and unique products will be produced. The goods and services produced will be more dependent on capital (equipment) rather than other production factors like labor (Victor, 2012). This will reduce human error, ensure and increase efficiency as well as streamline the planning of labor. The economy will reap the benefits of increased demand for UK products abroad due to the quality and uniqueness brought about by innovation.
BritishCommerce Chambers. (2014), Exporting is Good for Britain. BritishCommerce Chambers (Online), Available at:http://www.britishchambers.org.uk/policy-maker/policy-reports-and-publications/exporting-is-good-for-britain-market-barriers.html (Accessed: 26thJuly2014).
Carney,M. (2014), Trade, the Pound and the Recovery. Financial Times Online,Available from:http://www.ft.com/cms/s/0/a2e15f28-f6f9-11e3-8ed6-00144feabdc0.html#axzz38aOTeo5X (Accessed: 26thJuly2014).
Cask,C. (2010). Productivity Growth in Hi-Tech Manufacturing Industries.MonthlyLabor Review,Vol. 23, pp. 16-31.
Gelis,P. (2014), What British Pound’s Current Strength Means forBusiness. Growth Business (Online), Available from:http://www.growthbusiness.co.uk/growing-a-business/financial-management/2463307/what-british-pound-sterlings-current-strength-means-for-businesses.thtml. (Accessed: 26thJuly2014).
Lavelle,P. (2014), Advantages of a strong and a weak pound. Pure FX (Online),Available from:http://www.purefx.co.uk/foreign-currency-exchange-advice/view/what-are-the-advantages-of-a-strong-and-weak-pound/(Accessed: 26thJuly2014).
Lein,K. (2010), the Pros and Cons of a Strong Currency. YahooFinance(Online), Available from:https://au.pfinance.yahoo.com/our-experts/kathy-lien/article/-/9215869/the-pros-and-cons-of-a-strong-currency/ (Accessed: 26thJuly2014).
Ohlin,G. (2006), “Balanced Economic Growth”, AmericanEconomic Review,Vol. 49, pp. 338-353.
Strauss,D. (2014), UK industry Divided on Impact of Pound. Financial Times(Online), Available from:http://www.ft.com/intl/cms/s/0/1672d982-c629-11e3-9839-00144feabdc0.html#axzz38aOTeo5X. (Accessed: 26thJuly2014).
Victor,Z. (2012). Overview of the engineering and manufacturing sector inthe UK. Prospects (Online). Available from:http://www.prospects.ac.uk/engineering_manufacturing_sector_overview.htm (Accessed: 26thJuly2014).
Wintour,P. (2014), Devolution as Key to Balanced Economic Recovery. TheGuardian (Online). Available from:http://www.theguardian.com/politics/2014/jul/01/lord-adonis-review-backs-devolution-cities-counties-economic-growth (Accessed: 26thJuly2014).