Exports to the rescue.

(From Financial Director)

Byline: Dennis Turner is chief economist at HSBC.

Most economic forecasts this year have been upbeat. Even February's increase in base rates can be interpreted in a positive light since it reflected the Monetary Policy Committee's view that activity was strengthening to the point where there was a risk of inflation returning.

A key factor in the Bank of England's decision was accumulating evidence of an upturn in the global economy and an improving international environment featured in Gordon Brown's forecasts for 2004. In his pre-Budget statement, the Chancellor had pencilled in export growth of 5.5% this year and 7.25% next year.

This is certainly a challenge; a rate of export growth the UK has managed only once in the past seven years or so, and then the environment was much more favourable. Whether it is a realistic forecast will depend largely on two key factors. First is the exchange rate, and here the message is mixed. Against the euro, the pound has weakened over the past year or two and is back at the launch price of 70p. This should be good news for those British companies trying to export to Euroland, which is not the case for those looking for customers across the Atlantic. The weakening dollar has been one of the dominant features of the world economy in recent months, and it may fall even further below the current 11-year lows of $1.85-1.90. Certainly, it will be a long time before it returns to the $1.60 mark, a rate that many British businesses feel is 'normal', which will make selling into the US difficult.

The second key factor for exporters is the likely level of demand in these overseas markets. Here, the message is equally mixed but the wrong way round for British companies. In the US, there are clear signs of life. Interest rates of 1%, huge tax cuts and a weak dollar have led to upwards revisions to the outlook in the US in this presidential year.

GDP growth of about 4% looks on the cards for 2004, although the difficult issues associated with the twin fiscal and external deficits could act as a drag on activity in later years. While the short-term market prospects look good for potential British exporters to the US, the exchange rate has moved in the wrong direction and could act as a drag on sales.