Portugal has been held up by the Financial Times as a good example to warring British MPs to ‘get real’ over the implications of Brexit.
Writer Chris Giles explains that “Brexit, we were told, will improve Britain’s trade performance through the depreciation of sterling. It will resolve the UK’s economic imbalances, shifting growth from consumption to production”.
But signs are that this is not really happening.
As Giles explains, comparisons between Britain and Portugal are “more than apt”.
“Both countries are on the western edge of Europe with proud naval and trading histories. Both have had persistent problems with trade deficits in recent decades. Both have had a difficult decade, but domestic demand growth has been similar in both for four years.
“The big difference is currency movements. Sterling has fallen 17 per cent since late 2015 against Britain’s trading partners, a period in which the equivalent measure for Portugal rose 2 per cent.
“With such stark exchange rate differences, it would be natural to see net trade — exports minus imports — contributing more to Britain’s growth rate than that in Portugal over the past year. UK imports have become pricier and exports more competitive.
“But in most recent data comprising the year to the first quarter of 2017, net trade subtracted 0.2 percentage points from the UK’s growth rate while adding 0.5 percentage points to Portugal’s rate”.
In other words, “Sterling’s slide has not helped Britain” at all.
And so it goes on, no doubt leaving all those who joined hands to take that leap into the unknown on June 23 2016 wishing they had packed a parachute.
While British “rebalancing” towards production has been “notable for its absence”, Giles reports that “industrial output in Portugal has grown 4.8%.
In short, “Brexit has not given the UK a more balanced economy.
“Surely, at least, the Leave vote has spurred UK companies to broaden their horizons and focus exports outside the EU? Again, no”, says Giles.
“With the depreciation allowing exporters to raise prices, British export values to the EU27 were 15.5 per cent higher in the year to the first quarter, a more rapid improvement than the 13.8 per cent growth rate to non-EU countries.
“But compared with Portugal, these figures look disappointing; over the same period its exports to outside the EU grew 33.2 per cent with a 51.6 per cent rise in US exports.
“These are the sort of numbers that would have Brexiters salivating, if they related to Britain rather than Portugal. The UK is still only at the start of a prolonged Brexit process, but the promised sunlit uplands of balanced, export-led growth are as far away as ever.
“There are two lessons Portugal can teach Britain”, comes the bottom line.
“First, you don’t need a currency depreciation to rebalance your economy and improve your trade performance in the modern world.
“Second, you don’t need to leave the EU or the single currency area to promote exports to the wider world.
“There is a third lesson from Portugal that Britain should also consider. If the rest of the world loses confidence in your nation’s ability to run its economy, it may refuse to finance a large persistent current account deficit. When this happened to Portugal between 2008 and 2012 it had to eliminate its deficit rapidly. The vast majority of that adjustment came not from growth in exports but a crunch in demand and depressed living standards. Brexit is failing to reduce the risk of a similar current account crunch in Britain. The best you can say of it so far is that we are fortunate that the world has not yet noticed”.
As we intimated at the beginning, this is a good news story for Portugal in a week when elsewhere asset managers like JP Morgan have been sounding alerts over the country’s ‘continuing vulnerablities’ (referring particularly to matters financial).
But viewed from another angle, it is perhaps a very ‘dismal news’ story for Britain.
