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.
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
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.
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