From RBS:
Dear Mr Rogers,
We followed with interest this week’s media scrum around your Armageddon-esque vision of Britain.
That the UK economy faces serious recession is beyond doubt. Few doubt either that the pound is at risk of further decline, possibly sharp and disorderly. But some of the reasons that you wheel out in support of the Anglo apocalypse cannot be allowed to pass without challenge.
Your pessimism on the UK and the currency seems to be premised most heavily on North Sea oil running out and on the UK having nothing to sell beyond financial services.
Your emphasis on the oil question is particularly intriguing, not least because the UK has been running persistent deficits in its trade in oil for over four years now (Chart 1). While some markets function with a lag, to cite this as a major negative influence for 2009 and beyond seems an implausible stretch. As far back as the 1990s, UK oil exports averaged just 1.2% of GDP, a far cry from the 4.6% in 1984 (Chart 2). Oil has been a useful source of tax revenue for successive governments, but there is really no basis for claiming it is central to UK economic growth, let alone employment.
Your contention that the UK has nothing to sell also seems exaggerated judging by the data. UK exports form a rising share of output, reaching almost 30% of GDP in 2006-07 from an average of 11% in the 1960s, 15% in the 1970s and 17½% in the 1980s (Chart 3). The related argument that the UK no longer has any sort of manufacturing sector is similarly open to challenge. As with most developed economies, manufacturing is shrinking as a share of GDP but – even in the UK – is still larger than the financial intermediation sector.
None of this is to ignore the profound difficulties facing the UK financial sector, of which we could hardly be unaware! In a stilldeleveraging world, in which banks grapple with balance sheet reduction and where capital flows home and stays home, both the UK economy and sterling are most vulnerable.
But your argument that the UK goes to the dogs because the oil’s run out and because it has nothing to sell, while making for good soundbites, lacks rigour.
Respectfully yours,
David Simmonds,
Head of FX & Emerging Markets Strategy
Ross Walker, UK Economist
Royal Bank of Scotland
And the charts:
