The Wall Street Journal February 27, 2009
Britain's Economy Will Pull Through When global demand rebounds, we'll be ready.
By PETER MANDELSON
For a month or so now, some pundits have been suggesting that Britain is uniquely vulnerable to the global economic downturn. With many of its banks damaged by the credit crunch and consumer confidence weak, the argument goes, its economy is in deeper trouble than most. Jim Rogers, the international financier and former partner of George Soros, was recently quoted as saying that Britain "had nothing left to sell."
But before we start shorting the U.K., does this case actually hold up?
Like all advanced economies, the U.K. has taken an early hit from a credit crunch that began with a serious failure in financial markets
-- perhaps even more than most because of its large financial-services sector. Its high levels of consumer spending are now subject to a sharp adjustment as people and families retrench and focus their resources on repaying debt. The impact of a sharp contraction in domestic and global demand, especially for homes and big ticket items, has hit British retailers, manufacturers and the construction industry particularly hard. Britain, like the rest of the Organization for Economic Cooperation and Development (OECD) member countries, is in a painful recession.
But how does this distinguish the U.K. from the rest of Europe or other OECD countries? Other big exporters like Japan and Germany are also feeling the impact of contracting global demand. Gross domestic product contracted more sharply in both these economies in the last quarter of last year than it did in the U.K. Rather than exceptional, Britain's experience is a local version of a global economic phenomenon. The U.K. acted quickly to stabilize and repair its banks, and to get credit flowing again to its small firms.
What about the U.K.'s long-term public finances? Like most G-7 economies, Britain has opted to borrow to cover the costs of its banking rescue, a targeted fiscal stimulus and the rising cyclical costs of supporting those temporarily out of work. Tax revenues have inevitably been affected by falling growth. But even this new borrowing still leaves the U.K. with a public debt that is not out of line with other European Union and OECD countries.
Just as importantly, when the government announced its borrowing plans last year, it made clear commitments to specified tax increases and a slowed rate of public-spending growth from 2011 onwards. This is a commitment that markets, in setting the cost of long-term British debt, have rightly taken very seriously. The pound has weakened, but there has been no sustained flight from sterling.
The commitment to balanced, long-term growth is vital. It builds on clear convictions about what a successful globalized economy must look like. Britain has some of the world's most flexible and competitive labor and product markets and is as open as any economy in Europe to trade and foreign investment. Britain has consistently been ranked as one of the best places in the world to start and build businesses. This has helped deliver growing productivity and record employment.
These fundamentals are the real story. Regardless of the adjustment the economy will go through, the underlying strength of the U.K. will remain. As global growth and demand picks up again, our openness and flexibility will be key assets, as will our global trading networks and a competitive pound.
The City of London will remain a global hub for financial services, even if it is not fashionable in British politics to say so right now. British manufacturing will also continue to flex immense muscle. Over the last 20 years, U.K. firms have carved out global successes in, for example, precision manufacturing, pharmaceuticals and aerospace -- all sectors of high added value. With its open business climate, Britain has an enviable track record in attracting foreign investment.
In the huge new market for low carbon emissions, the U.K. has the sixth largest environmental goods and services sector in the world, with strengths in everything from low-carbon engineering to environmental consultancy. In 2007, the U.K. hosted a third of all European, low-carbon venture capital investment. The U.K. will also remain a powerhouse for creative industries -- exporting more cultural goods in some recent years than any country in the world, including the U.S.
None of this is an argument for complacency. Nor does it diminish the pain the recession will bring. The U.K. faces the same global crisis of credit and demand as every other part of the global economy.
Like every developed economy, Britain has lessons to learn from the credit crunch. But the flexibility of the U.K. economy also makes it resilient. Twenty years of openness to globalization have tested and proved its capacity for economic renewal, and made its firms among the strongest in the world. If its globalized economy is exposed to a slump in global demand, it's also positioned to benefit from that demand when it grows again. Jim Rogers may think we have "nothing left to sell." You'd be a fool to buy that.
Mr. Mandelson is the U.K. secretary of state for Business, Enterprise and Regulatory Reform.