Finance is still Britain's economic golden goose

Another month, another set of decidedly ugly trade figures for the UK economy.

Now, in fairness, Britain’s £3.4bn trade deficit in November was at least a slight improvement on the £3.7bn recorded in October. But even looked at through rose-tinted glasses, the figures are hardly flattering – particularly the balance in trade of goods. The coalition government has pledged to try to “rebalance” Britain’s economy, which essentially means ensuring it isn’t overly reliant on one single sector for growth.

For many this is shorthand for trying to revitalise the manufacturing sector and increase the amount of UK goods sent overseas.

However, as this chart shows pretty vivdly, there really hasn’t been any rebalancing at all in recent years.

Goods and services trade balances as a percentage of GDP

On the contrary, Britain’s goods trade deficit has yawned wider and wider (since 1997, as it happens) until, this past year, it rose to over 7% of GDP. That was even worse than the 6.8% of GDP it hit in 1974, a couple of years before Britain was forced to get an emergency International Monetary Fund loan.

However, the story isn’t all doom and gloom: as you can also see in that chart above, one thing keeping the overall trade picture in slightly better shape is a steady rise in Britain’s balance of trade in services.

To a large extent this is a reflection of the fact that Britain’s economy is now far reliant on the services sector than manufacturing. But this isn’t the full story – after all, most services are not fungible or internationally-tradeable: you can’t export a haircut, for instance.

So what’s really buoying up our trade balance? There’s a short answer: finance. Buried away in the Office for National Statistics website are figures which reveal that finance is by far and away the most important positive contributor to Britain’s trade balance. As you can see from this chart, the surplus on trade from finance more than offsets the deficit from trade in oil. And it remains more than double its rate of the 1980s and 1990s.

Balance of trade in finance and oil as a percentage of GDP

In fact, finance has accounted for around half of Britain’s trade surplus for some time, and its importance for the balance of payments has hardly diminished despite the chaos of the financial crisis.

Breakdown of trade surplus in services, Q3 2012. Figures from ONS

This is what helps explain why, in spite of their pledges to rebalance Britain’s economy, the Government is desperate to avoid imposing any new policies or regulations that would drive financiers out of the City of London. It is the Golden Goose that has prevented Britain’s trade balance from plunging into danger territory.