At one level, today's UK trade figures were encouraging. Exports to countries outside the European Union were up 2% to a record high as UK firms started to penetrate some of the world's faster-growing markets. The share of British exports going to the EU dropped to just over 45%, its lowest level since modern records began in 1988.

So is this evidence of the long-awaited rebalancing of the economy the government has been waiting for? Not quite, because the sharp decline in exports to crisis-hit Italy and Spain is offsetting all the good work being done in China, India and Brazil.

As a result, overall export volumes fell in the first quarter while imports rose, strongly suggesting that trade was a drag on UK growth in the first three months of the year.

That makes it easier for George Osborne to point the finger at the eurozone as the reason for Britain's stuttering economic recovery. But while the chancellor says it is the unresolved sovereign debt crisis rather than government austerity that is doing the damage, this doesn't quite ring true for three reasons. Firstly, the flatlining of the economy has been going on for five quarters, long pre-dating the intensification of the eurozone crisis last autumn.

Secondly, it was only the boost provided by net trade that prevented the UK output from declining in 2011. A breakdown of GDP from the Office for Budget Responsibility showed that weak private consumption shaved 0.5 points off growth and lower government consumption a further 0.3 points. Net trade, by contrast, contributed 1.2 percentage points, which helped the economy grow by 0.8% overall. The data is clear: it has been the domestic side of the economy that has been holding the UK back, not overseas demand.

Thirdly, if the eurozone crisis is to blame for the UK's double-dip recession, you would expect the impact to be still greater in Germany and France, countries that actually use the single currency.

Figures out today, though, showed that Germany expanded by an impressive 0.5% in the first three months of 2012, while French output stagnated. Finland, Austria and Belgium all also recorded an output rise.

That's not to say that these eurozone members will continue to be immune from the effects of the crisis. Indeed, the chances are that recession will spread northwards across the eurozone over the coming months unless there is a quick and decisive end to the crisis. That looks improbable, and British exporters should anticipate a testing period in which falling demand from Europe coincides with the blow to competitiveness caused by a rising pound.


Larry Elliott, economics editor

The GuardianTramp

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