Today is that time in the month when we get to see how bad the UK’s balance of payments position is! Also some perspective was provided yesterday by the turmoil and indeed currency depreciation in Turkey. If we examine the problems in the current account of the balance of payments that Turkey has combined with a deterioration in its net international investment position who does that remind you of? As I pointed out such developments there have come with a currency heading downwards on a substantial scale and by the standards of these times high inflation.
There was a time when the UK financial services industry was seen as a way of us improving our exports and thereby reducing our persistent balance of payments problem. Back then our banks bestrode the world whereas only this morning we have already been told that these are very different times. From HSBC.
Reduce Group RWAs by at least circa 25% and redeploy towards higher performing businesses; restore GB&M profitability.
The use of acronyms is a sure sign of trouble but RWAs are Risk Weighted Assets and therefore HSBC is retrenching on a considerable scale. This poses a problem as of course this is exactly what regulators and politicians want banks to do until they actually do it as they mull the lost jobs and economic output. Damned if the do and damned if they don’t! According to Siobhan Kennedy of Channel 4 News this has just been announced at the press conference.
HSBC CEO confirms 25k jobs to go globally, 7/8k jobs in the UK
Also this factor makes one wonder how long the HSBC head office will remain in the UK.
Contribution from Asia gone from 33% in 2004 to 64 % in 2014. Said massive growth opps in pearl river delta and ASEAN. Bigger than uk/EU.
This poses questions for UK output and employment which of course is something of an irony just after we have been told this by Chancellor George Osborne. From the Financial Times.
George Osborne will signal an end to “banker bashing” next week, amid a clamour from the City for him to ease off on regulation and cut the controversial bank levy.
This sort of thing can really mess with your mind when you try to figure out which is the chicken and what is the egg! Especially as we note all the signs committed by bankers since the credit crunch (Libor and foreign exchange fixing for example) and note that Iceland which abandoned the too big to fail banking safety net is on its way to abandoning capital controls.The Mansion House speech is tomorrow night by the way.
If we return to concentrating on trade here according to a House of Commons report from February is the impact of UK financial services on it.
The trade surplus has been growing as a proportion of GDP over the last two decades, and although it dropped in 2008 it has since recovered. In 2013, the surplus on insurance and pensions was £20.9 billion and £38.3 billion on financial services. These two sectors therefore account for a large proportion of the services trade balance of £78.9 billion.
As you can see financial services do provide a considerable surplus for the UK. As the banking sector is plainly still retrenching that poses a question for the UK’s already troubled trade position going forwards. Also I note the surplus of the insurance industry and wonder how much that will be affected should the ultra-low long-term interest-rate and bond yield situation persist?
As to banker bashing another element of perspective is provided by the shortage of them in jail. If we had taken a different route maybe the banks would not still be retrenching some 7 years into the credit crunch. Oh and just a suggestion to HSBC as it looks for a new name in the UK, how about the Midland Bank?
The April numbers do provide a brief flicker of summer sunshine.
The UK’s deficit on trade in goods and services was estimated to have been £1.2 billion in April 2015, compared with £3.1 billion in March 2015………Exports of goods increased by £0.7 billion, of which £0.6 billion was attributed to countries outside of the EU.
So we have exported a little more and reduced the deficit. However you may note that falls in imports were much larger which provides another worrying hint that the UK economy may have slowed. Also there is a hint for the EU Referendum issue that we can indeed trade with the rest of the world! As it happens it was mostly chemicals (organic compounds to the USA).
However monthly figures are erratic to say the least and the clouds start to obscure the brief burst of sunshine when we look for some perspective.
In the 3-months to April 2015, the UK’s deficit on trade in goods and services was estimated to have been £7.2 billion; widening by £1.6 billion from the 3-months to January 2015.
In many ways here is our problem in a nutshell as we produce deficit after deficit in what is beginning to feel like an endless series. Rather oddly considering the economic improvement there we seem to be both importing less from and exporting less to the European Union area although we remain from their perspective very good Europeans.
In the 3-months to April 2015, the deficit on trade in goods with EU countries widened by £0.2 billion to £21.3 billion.
You might also have thought that the decline in oil prices would benefit the UK as we ae a net oil importer these days but this effect seems to have been swamped by the decline in North Sea output.
So for a long-term perspective there is this from the 2014 UK Pink Book.
The UK has recorded a current account deficit in every year since 1984
The last trade in good surplus was in 1982 and sadly the excellent effort below keeps being swamped by larger deficits elsewhere.
The trade in services account has shown a surplus for every year since 1966.
Unfortunately last year started to flash something of a red alert.
However looking over a broader time period shows a general deterioration in the current account; the deficit over the 2014 calendar year as a whole was £97.9 billion (5.5% of GDP), which was the largest figure since comparable records began.
Where this was awkward was that in addition to our existing issue we saw this development.
the deterioration in the current account has instead been driven by a large deficit in the primary income balance (mainly income earned by UK residents from investments overseas, less income earned by non-residents on their UK investments). ….. the 2014 calendar year figure of £38.8 billion also represented the largest deficit on record.
As these numbers are dreadfully inaccurate even by the poor standards of trade figures we are left both troubled and uncertain. But when I pointed out earlier that the UK has some similarities with Turkey well you can see now that we do.
Let me open with a basic point of economic theory which text books tell us is that a sustained balance of payments deficit leads to a currency fall with an open economy and flexible exchange-rates. Now consider that the UK Pound £ bottomed in trade-weighted terms in March 2013 at 77.98 and has been rising ever since and was 90.64 yesterday. Just as the UK current account deficit surged! Whilst foreign exchange traders do miss some things believing that there has been over 2 years of myopia is a bit much. So another chapter of our text books needs modification. This has had all sorts of casualties after all didn’t Max Keiser relocate to the UK some 2/3 years ago for a UK Pound £ collapse?
Meanwhile we do genuinely have a problem as our propensity to import sucks life from our economic growth efforts. The latest UK GDP (Gross Domestic Product) figures reminded us of that.
Net trade made a negative contribution to GDP of 0.9 percentage points.
Now we face ever more retrenchment in what is one of our strongest trade areas which is banking. The HSBC announcement is just one in a very long list. It of course will have quite a lot of symbolism should it move to the Far East but it does pose future issues for the UK’s already troubled balance of payments.