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U.K TRADE FIGURES – DECLINE IN DEFENCE INDUSTRIAL BASE?

20 Dec 07. The Reports earlier this year about the cost of the wars in Iraq and Afghanistan centred on Urgent Operational Requirements (UOR)where the total of money spent now exceeds £2bn. What has been kept quiet is the cost of these UORs to the Trade Figures. The dismantling of the Defence Industrial base started by the Tories as part of the Peace Initiative at the end of the Cold war in 1991 and speeded up by Labour has meant that the U.K. now imports a great deal of its defence equipment from overseas. The Labour government appears to have some antithesis to the Trade figures suggesting that the free movement of money does not affect our ability to finance ourselves and of course income from City investments overseas will cancel out any of these deficits. Didn’t they look at history to see how the Second World War destroyed the U.K. balance of payments and that was at a time when we had a strong defence industrial base. The Defence Industrial Strategy spearheaded by Lord Drayson was brought in resulting from concerns at the loss of key Intellectual Property to overseas company’s buying U.K. assets. IP has never been a strong point of this Government’s policies! But the stable door has been closed far too late with Raytheon Systems Limited being one casualty when it was excluded from the future missile requirements team at a time when the U.K. is buying two key missiles, Javelin and AMRAAM from Raytheon! Before we list the products imported in this £2bn spree we must look at the Trade Figures recently released, the worst since 1952.

The FT reported that a wave of bad economic news hit the government on Thursday, a day after the prime minister and the chancellor insisted the economy was fundamentally strong and would “weather” global financial storms. The credit squeeze has contributed to the worst public finance deficit ever in the first eight months of the financial year and an annual drop in new mortgage lending. It has also choked off growth in money deposited in banks.

The biggest surprise was the Office for National Statistics’ revelation that the current account deficit widened from a revised £13.7bn to a record £20bn in the third quarter, equivalent to 5.7 per cent of gross domestic product, giving Britain the unenviable record of the largest current account deficit in the group of seven leading countries. The most worrying figure for the government is the sudden and deep deterioration in the public finances, caused in the main by a shortfall of tax revenues. Analysts said the data presented an “ugly picture” of an unbalanced economy that could be one of the most vulnerable in the G7 to the effects of the credit squeeze.

“It is worrying to think the new chancellor has no room for manoeuvre and will
have to tighten fiscal policy when the economy is in a tail spin,” said Peter
Spencer, chief economic advisor to the Ernst&Young ITEM Club.

Kevin Daly, of Goldman Sachs, said the figures made “bleak reading” and “are
especially negative for sterling”. The pound fell against almost all other
leading currencies. It was down 0.9 per cent on a trade-weighted index by the
close.

The news brought a short hiatus to Thursday’s morning’s rise in gilt prices,
which was driven by investors concerned about continued problems in the credit
markets.

However, the opening of the US Treasuries market and more bad news from Bear
Stearns, a US investment bank that is suffering large losses from
mortgage-related business, helped to send UK gilt prices still higher in the
afternoon.

The explosion in the current account deficit was due largely to big revisions to foreign investment income. Such a wide gap between the amount Britain spends and what it produces has never been sustainable in the past, leading either to a
falling currency to boost exports or a sharp slowing in spending to curtail
imports.

Economists at the Royal Bank of Scotland said the risk of a slide in sterling
presented “a fur

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