Also, it only struck me this week how ridiculous it is to have all these Swedish banks giving the advice to stay on the peg, when Sweden itself is not pegged to the euro, and is able to "correct" in a way which Latvia isn't. Sweden again is a country with a substantial economic tradition. There is now quite a debate going on inside Sweden itself about the extent of that country's responsibility for what is going on in the Baltics (see the two differing points of view I have put up in the comments section to the last post). Also note (from the extracts from the IMF report I have also put up in comments to the last post) the way in which it is now clear that it was pressure from the EU - who didn't want Latvia to throw itself at the mercy of the euro - which has created this ridiculous situation. The IMF seem to have favoured widening the band to + or - 15%, as a first step to entry into ERM2.
The latest person to start to complain has been Neivelt, chairperson of the Estonian Development Fund is saying that Estonia isn’t competitive with its current cost base, and the only option that faces the country is lowering prices and cutting salaries.
“Our main problem after this consumption party is competitiveness. The money has been devalued in many export markets. With our expense base and prices we are no longer competitive. Polish food is going to Lithuania and it’ll be here soon. Soon we might not be able to produce food competitively,” Neivelt said. “Today is the situation that shopping in the UK is cheaper, sitting into the taxi is cheaper than in Tallinn, eating out is cheaper than in Tallinn – with our prices we aren’t competitive,”
Estonian PM Andrus Ansip also acknowledged in a press conference yesterday (Thursday) that one of the reasons for the deterioration of the current crisis in the country is that some of the governments in some export markets such as Ukraine, Russia, Sweden and UK had gone for allowing their currencies to weaken against the euro.
And one thing they realise in the UK - and that people in Latvia seem to be struggling with - is that the slump won't last forever - but that since the internal market will be low growth, then exports will be crucial in raising living standards. So even if you can't export much in 2009 and 2010, this is no reason not to get ready to start exporting in 2011 and 2012.
While exporters have benefited from the cheaper pound in higher profits rather than higher market share, he feels that will change as business conditions become more challenging and when the global economy recovers. “There will come a time when British exporters will have to compete on price,” as well as on quality.
With the pound more competitive than in years, Sir Andrew (Cahn, chief executive of UK Trade & Investment) feels the time is ripe to “market Britain as never before” so the economy can benefit from export-led growth once the global recession is over.
New look UK economy to emerge from gloom
By Chris Giles, Economics Editor
A slimmer financial services industry, lower house prices, higher borrowing costs, fewer migrants and lower growth rates: these are the features that will distinguish the economy forged in the crucible of recession, according to an FT analysis.
But, according to the research, the years of downturn will also boost exports and see the private sector start to regain some of the ground lost to the public sector over the past decade.
Gross domestic product data covering the final three months of 2008 will on Friday provide the latest evidence of the depth of the recession which has been under way since the late summer. Economists believe output is unlikely to climb back to last year’s levels until late 2011 or 2012.
So where should businesses invest and graduates seek employment if they aim to surf the wave of recovery?
Even when output recovers to its 2008 levels, unemployment will be higher than it is now. Malcolm Barr of JP Morgan forecasts the economy will grow more slowly as east European migrants find the UK a less attractive place to work.
On the output front, the most likely change is a relative decline in financial services. Ray Barrell, of the National Institute of Economic and Social Research, predicts that sector will fall back to 6 per cent of national income, its level in 2000, down from the high of 8 per cent reached in 2007. “The country, or at least London and Edinburgh, will be poorer than we had thought it would be.”
In contrast, the public sector will be playing a bigger part in the economy, as the government reluctantly compensates for reduced private sector activity.
Mr Barr adds: “To the extent the state is more involved [in the economy], it is by dint of decisions it would have preferred not to have taken.” This is likely to be the sector’s high watermark, however, given planned cuts in public spending.
By 2012, the big winner – strikingly, given the decline in the industrial base over many decades – may be manufacturing. Although the sector is taking a hammering, the pound’s continuing weakness should encourage longer term investment and increase output. Simon Hayes of Barclays Capital says: “In a complete change to the past eight to 12 years, there is every reason to expect exports will be, relatively speaking, thriving.”
Expenditure patterns are likely to alter markedly as a result of the downturn. The fall in house prices, which are likely to wind up about 30 per cent below their peak, will almost certainly permanently reduce consumption as a share of national income, raising saving levels as well as net exports.
Wages will form a bigger share of national income, reflecting the drop in income and profit that will be suffered by companies. But once the recovery is under way, profits are likely to rise strongly again.
Carl Emmerson, deputy director of the Institute for Fiscal Studies, rejects the notion that any real benefit can be reaped from the downturn. “It is difficult to think of winners,” he says, arguing that by 2012 a large amount of expected economic output will have been lost for ever.
He concedes that among the better-protected groups are those who have retired on secure incomes who should not lose out provided they do not want to trade down in the housing market. Younger people will also have the chance to pay less for housing once credit constraints ease.
But the big losers are those who bought property at the height of the market or are close to retirement without final salary pensions, the newly unemployed and the very rich, whose incomes tend to be correlated with the stock market.
Will the British model of capitalism have undergone a lasting shift by the time the nation emerges fully from the downturn? Ross Walker, of the Royal Bank of Scotland, warns the private sector’s contraction in contrast to the public realm means “we are likely to end up losing entrepreneurial spirit”.
But that, he suggests, reflects the true nature of the economy over the past decade. “The credit boom went a long way to disguising the mediocrity of the UK,” he says.
Cheerleader in good spirits
The pound is plummeting, the once booming financial services sector has never been weaker and some investors are losing confidence in the UK. It has rarely been a more difficult time to be Britain’s chief cheerleader abroad but Sir Andrew Cahn, chief executive of UK Trade & Investment, is in good spirits.
“There is no doubt we’ve taken some damage to our image,” he told the Financial Times after speaking on Thursday to the Whitehall & Industry Group, a charity that wants greater collaboration between bureaucrats and business.
“But one of the important things is to acknowledge mistakes and we do that well in Britain,” he said, referring to the feverish activity across the public sector aimed at improving financial regulation.
But at the heart of Sir Andrew’s confidence is the fall in sterling. “The most important benefit is that our exports are more competitive and we are continuing to attract inward investment as [UK] assets are cheaper to buy.”
While exporters have benefited from the cheaper pound in higher profits rather than higher market share, he feels that will change as business conditions become more challenging and when the global economy recovers. “There will come a time when British exporters will have to compete on price,” as well as on quality.
Sir Andrew feels export success will come from some unlikely sectors. “We have doubled our staff on security because it is a growth area,” he says, insisting that security is not just defence equipment but airport protection systems, protective clothing, and security advice and services at sporting venues.
With the pound more competitive than in years, Sir Andrew feels the time is ripe to “market Britain as never before” so the economy can benefit from export-led growth once the global recession is over.
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