“And the beat goes on” for the UK Balance of Payments problem

A feature of the UK economic landscape which resembles a ticking time-bomb is the way that over the last two to three years the UK balance of payments situation has deteriorated. Just before Christmas we received another bombshell on this issue as this excerpt from my blog of the 23rd of December illustrates.

The United Kingdom’s (UK) current account deficit was £27.0 billion in Quarter 3 2014, up from a revised deficit of £24.3 billion in Quarter 2 2014. The deficit in Quarter 3 2014 equated to 6.0% of GDP at current market prices, up from 5.5% in Quarter 2 2014.

The 6% of Gross Domestic Product (GDP) deficit in the third quarter of 2014 is quite eye-catching is it not? It followed on from other increases and this time around it was more the current account that the balance of trade for the reasons discussed below.

The widening of the current account deficit was mainly due to a widening in the deficit on the primary income account from £8.2 billion in Quarter 2 2014 to £12.6 billion in Quarter 3 2014. This reflects receipts from foreign direct investment falling and payments to foreign direct investors rising.

What about rebalancing?

Regular readers will recall the words of the former Governor of the Bank of England Mervyn King and let me take you back in Dr. Who’s TARDIS to a speech of his just under two years ago on the 22nd of January 2013. Governor King was on his usual form as he was recommending an increase in monetary stimulus into the UK recovery boomlet! Also he told us this and the emphasis is mine.

The fall in our own exchange rate, of some 25% between late 2007 and the beginning of 2009, has reduced
the gap between our exports and imports in real terms from around 3 ½% of GDP to around 1 ½%. But the
persistence of the current account deficit is evidence that an adjustment of sterling of that order was certainly
necessary for a full rebalancing of our economy.

Governor King’s boasts certainly have a hollow ring to them now! Also if we continue the rebalancing theme which he plugged and plugged there was also supposed to be a boom in manufacturing which in Mervyn’s World would be driven by the exchange rate fall. How has that gone? From today’s data.

In the three months to November 2014, production and manufacturing were 10.3% and 5.3% respectively below their figures reached in the pre-downturn GDP peak in Q1 2008.

So as the UK economy has now grown over the period we can conclude that instead it has reduced both the absolute and relative size of its manufacturing sector. Perhaps Governor King confused the words towards and away.

Today’s trade data

The headline implied some better news for once.

Seasonally adjusted, the UK’s deficit on trade in goods and services was estimated to have been £1.4 billion in November 2014, compared with £2.2 billion in October 2014.

However of course it is yet another deficit in a very long sequence and had an intriguing issue in the detail.

The narrowing of the deficit reflects a fall in imports of goods rather than an increase in exports. Between October and November 2014, exports of goods fell by £0.1 billion to £24.4 billion. Imports of goods fell by £1.1 billion to £33.2 billion over the same period, reflecting a £0.7 billion
decrease in imports of oil.

Another benefit from the falling oil price in a world where so many commentators try to set it up as a bad thing.

If we look for more perspective we see this.

In the three months ending November 2014, the trade in goods deficit narrowed by £2.5 billion to £29.2 billion. Exports increased by £2.0 billion to £73.0 billion, of the increase, £1.1 billion was attributed to exports of erratics. Imports decreased by £0.5 billion to £102.2 billion.

Whilst it is small fry in the scheme of things it is nice to see the deficit narrow. Oh and the use of “erratics” raises a wry smile as frankly the numbers overall are that! Perhaps “more erratic” would be better.

In the detail there was something of further note.

In the three months to November 2014, the UK recorded its largest ever deficit with Germany (£7.8 billion), reflecting a decrease in exports and a slight increase in imports.

Also there has been an improvement in the services balance which has long been a strength of the UK economy.

The surplus on trade in services for November 2014 was estimated at £7.4 billion

Last November the services surplus was estimated to be £6.3 billion as we hope for further improvements. However there is a cautionary note as we get so little detail and information on this.

This bulletin also reports on trade in services. However, the information on trade in services is mainly obtained from quarterly surveys, in some cases underpinned by larger annual surveys.

In other words they send out monthly numbers which in truth they do not really have on a reliable basis. Accordingly we can believe that there has been an improving services trend but how much is uncertain.

In summary the picture remains troubled especially if we consider that in our list of nations we export to then four countries from the troubled Euro area (Germany,Netherlands France, and the Irish Republic) are in positions two to five.

At this stage we do not get any information on the income account which has been the most recent problem so please remember that should the media start one of their “improvement” days.

We are better Europeans than we are given credit for

The UK supplies a lot of demand to the Euro area which our political class never seem quite able to turn to actual influence.

In the three months ending November 2014, the deficit on trade in goods with EU countries narrowed by £0.5 billion to £19.0 billion……..Between the three months ending November 2014 and the three months ending August 2014,
imports from the EU decreased by £0.6 billion (1.1%) to £55.5 billion.

UK Production

Today’s data release was not inspiring although in a type of irony former Governor King may let out a cheer at some of the detail.

Total production output increased by 1.1% in November 2014 compared with November 2013. Of the four main sectors, manufacturing (the largest component of production) was the only one to rise, increasing by 2.7%.

On a monthly basis overall production fell although that is no doubt influenced by the falling oil price which impacts on the mining sector. Oh and the irony for former Governor King builds as of course the recent increase in UK manufacturing has been accompanied by a stronger level for the UK Pound. Perhaps he might like to listed to this from Fleetwood Mac.

I can’t help about the shape I’m in
I can’t sing I ain’t pretty and my legs are thin
But don’t ask me what I think of you
I might not give the answer that you want me to

Oh well

Also if the numbers are not inspiring then official statisticians know what to do, blame the weather!

Evidence suggested this decrease reflected the warmer than usual temperature compared with a year ago.

Comment

These days both commentators and quite often markets ignore trade and balance of payments problems. The problem is that this is like the “phoney war” which existed for a time in late 1939 and early 1940 which of course then became a real war but the issue is timing and when? Also if we allow our position to slide we will become ever more vulnerable and could even find ourselves returning to the dark days of the mid-1970s when the International Monetary Fund was required.

As it is Friday (if we did not know the day of the week all the ECB rumours would tell us…) let me summarise the UK balance of payments with some lyrics from the Whispers.

And the beat goes on
Just like my love everlasting
And the beat goes on
Still moving strong on and on

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16 thoughts on ““And the beat goes on” for the UK Balance of Payments problem

  1. I have always thought that the weak sterling strategy was a big mistake. Exports were doing rather well before the 25% devaluation whilst the fall in sterling must have pushed up our import bill. Time and again it comes back to the fact that the Eurozone isn’t buying (or not like it used to) and they are not buying whatever the export price is. Until this changes, or markets else where take up the difference ( a huge amount ) then I think we should be looking at ways to reduce our import bill. The fall in oil is a big help but a stronger currency should also be considered. There appears to be a mantra that a low international value for the pound will boost exports and this is maintained year in and year out despit lack of evidence of it working in any meaningful way. Isn’t it a sign of madness to keep doing the same thing over and over again and expecting a different out come?!

    • Hi Pavlaki

      One of the problems in economic is that there is no equivalent of a test tube in which one can carry out experiments. To that extent the concept of ceteris paribus is misleading. However I think that we do learn from the 1992 devaluation which had success and the 2007/08 one which by the time you factor in the extra inflation had very little benefit. My suggestion would be that under Nigel Lawson we had shadowed the German Mark ( 3+ was the aim) and that we were coming down from too high a level. Whereas in 2007/08 the UK Pound was not especially high and had been relatively stable for a few years. Also the international environment has turned out to be much less favourable.

      The concept of smooth demand and supply curves for currencies of economics 101 collapses when we reach the real world and economy.

      • You would think that after 6 years of devaluation and no significant export growth (and boom in our import bill) that someone would start to consider an alternative strategy. We’ve had the experiment and, unlike 1992, it isn’t working. Time to try something to reduce cost of imports?

  2. I often wonder about when it’ll all end and a rerun of the 70’s bail outs begin.

    I note the fiscal deficit is still ballooning the detb nicely,but that hasn’t stopped japan failing to deal with the real issues.

    Love your blog Shaun but it’s depressing reading.

    • Hi Dutch

      The new mantra is that public-sector debt does not matter. What is forgets is that these things are not necessarily the new normal but actually depend on other factors. for example debt affordability has been improved by the fall in bond yields and hence issuance costs which has been influenced by the fall in inflation.

      However for the capital burden of the debt then a low inflation and low growth environment poses future problems as that poor battered can gets kicked again to some unspecified future date.

      As to reality I am afraid that some and at times much of it lacks the cheer of the season which has just passed.

  3. Hi Shaun,

    ‘The Super Rich and us’ on BBC2 last night (now on iPlayer) was an enlightening watch.
    They touched on the re-development at the former Battersea power station which has been mentioned by yourself in the past. 80% of the properties in the development and 70% of all new builds in the capital are being sold to foreign investors. One contributor to the documentary spoke of the limitless tide of money pouring into London property and how eventually the capital simply won’t be able to function if homes simply become another form of investment for the super rich.
    The central message of the program was that Thatcher/Regan’s ‘trickle-down’ low taxation economics hasn’t worked and the evidence is that we have a state of ‘trickle-up’ economics instead leading to grotesque inequality which is even starting to worry some of the billionaire contributors to the program. Interesting times…..Pass Forbin’s popcorn please.

    • Funnily enough, I seemed to be the only one questioning the effectiveness and capacity of trickle down back in the early 80’s. I think it sad that it has taken 30 years for people to realise what I saw immediately…

    • Hi Zummerzetman

      Battersea Power station has been a landmark in my life in geographical terms and stares down at me (if a building can stare..) when I use Battersea Park running track. Plan after plan has come and gone with a long list of promises and the only bit that got built was the apartments.

      I hope that this time is different but as you say the fundamental issue is how many Londoners would be even able to think of buying one of the apartments?

    • UK property – it has always been a source of wealth for the landed gentry/aristocracy. Foreign investors are just Johnny come latelys to this rent ripoff.

      Logically, if foreigners keep pouring money in I’d predict a further expansion of the property bubble with extensively marketed luxury tower block apartments. At some future point the music will stop and bubble will burst.

      But if we want to achieve some measure of social justice and affordable housing, we could copy the German rent capping laws. This might have an additional benefit of reducing the housing benefit spending.

    • I saw it too…very interesting. At least Battersea Power station is being redeveloped at last (along with quite a lot else in London) and what’s more it’s foreign money which is doing it. If/when everything crashes then at least we will have some good housing which can be used by those living in London when the foreign “investors” pull out because prices are tanking and locals might be able to afford the reduced prices.

      This is what I’m hoping for……

  4. Shaun, when I did economics in 1983-6 then BOP seemed to matter however with the advent of the global economy, QE and electronic money those notions seem quaint. Perhaps it really doesn’t matter anymore, maybe we are in a new paradigm and rusty old rules no longer apply. Shoot me if I sound like G.Brown pronouncing the end of boom and bust….. ;-/

    • I’m sure it does matter if we buy more than we sell; I think it’s just we’ve learned how to drag the game out with access to cheap debt and flogging off the family silver.

    • Depends on capital and investment flows too. I don’t know the numbers but trade is only one item to consider for the overall equation.

      • Hi Noo2

        the situation looks like it is deteriorating in the wider income and capital accounts too. However the caveat is that we are dealing with very large numbers which are estimated and involve more than a few assumptions. Accordingly there is a high error range.

  5. Shaun
    I agree that the banks pulling out of the commodities market is partly causing the price
    drop but I suspect that it might be a larger effect than you think.
    I notice that you did not mention gold which turned upwards after this mornings bad
    news, It’s obviously greatly under valued, what do you think will happen? I thought of a golden oldie after reading todays post from Martha Reeves and the Vandelas

    Nowhere to run baby, nowhere to hide
    I know your no good for me
    But free of you I’ll never be no

    JRH

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