Hidden in the HSBC retrenchment announcement is another problem for the UK trade deficit

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.

UK exports

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?

Today’s numbers

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.

Longer-term trends

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.

Comment

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.

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16 thoughts on “Hidden in the HSBC retrenchment announcement is another problem for the UK trade deficit

  1. Hi Shaun

    You mention the potential impact of the HSBC retrenchment and I’m sure you’re right about this; it isn’t good from the BOP point of view.

    However, the offset to this is that a move of the locus of the bank’s operations may reduce the probability of exposure to a second banker bail out should things turn sour. Those that dismiss this possibility are, I contend, underestimating the chutzpah of the bankers and the supineness of the politicians and the degree of risk and the impact of a second bail out could more than counteract the income from financial services.

    Also re the move to relocate the HO of the bank to Asia I wonder if this isn’t a mere stunt to extort concessions re banking reform. China in particular, arguably, has a bigger bubble in real estate than we have and more of a bubble economy generally. Also they have a much greater demographic challenge than many other countries. The one child policy has been in place for many years and is really coming home to roost; I believe there will be a precipitate decline in the working population over the next thirty or forty years. I would have thought that concentrating on China right now would send the risk profile of the bank through the roof!

    I’m afraid that, whichever way these things fall, the UK has substantial structural issues to face; an economy that is too reliant on a very risky TBTF financial sector and one that finds difficulty in exporting “real” things for whatever reason (low productivity; too little R & D; too little training etc). However, you can rely on one thing above all: none of these issues will be addressed!

    • From Big Bang in the 1980’s through to Gordon Brown’s introduction of tripartite banking regulation, there were very few problems with the banks. 2000-2008 loose money and loose regulation added much fuel to the fire, which the US CDO match then ignited. Again the financial shock, bailout and nationalization of NatWest and Lloyds was also badly handled. So, although the banks were far from perfect the Labour Government also shares much of the blame. Hong Kong banks tend to be much more conservatively run where they found out in the 1960’s that if you go bust, then the authorities just close you down, so there is a real moral hazard here and there have been no further bank failures.

      Why are ‘non-real’ things like computer software or insurance, which can be high productivity one-to-many mass produced items like computer games or Internet sold insurance policies, any less worthy than ‘real’ things? What we need to do is export more and import less, it is irrelevant whether they are service or industrial sector goods.

      • Agreed re your last para esp the IT. However, it’s easy to miss how much services flow from making “real” things. How much of the IT is manufacturing related? I realise of course that the manufacturing doesn’t have to be here but there may be more of a connection than you imply.

      • Financial legislation generally began to be seriously relaxed in the early 80’s in the UK, particularly in relation to fractional reserve banking and creditworthiness of individuals/organisations seeking credit.

        The bankers of the time saw this was stupid and stayed away from taking advantage of these “opportunities”.

        Then, they retired and along came the barra boys parachuted in at the top of the banks whose only past “experience” was in sales and marketing. They looked at the loose legislation which had been sitting there for at least 15 years and with Brown’s encouragement took advantage of the “opportunities” resulting in the crash. The crash emanated from the UK as the US legislation was too tight on derivatives and collateralised debt whereas in the UK, the virtually non – existent legislation from the 80’s was still in place. So the US banks sold their bad debt in the UK where it was distributed from (thanks to lax UK legislation) around the World and hey presto! You have a global crash courtesy of slack UK legislation which was put in place 20 odd years earlier – it just took the players a long time to take advantage of that slackness. Interestingly, much of it is still in place despite all that has happened.

    • Hi Bob J
      I was wondering myself about this.

      “Also re the move to relocate the HO of the bank to Asia I wonder if this isn’t a mere stunt to extort concessions re banking reform. ”

      We had the Chancellor talking about an end to “banker-bashing” at the weekend and now HSBC hinting about leaving the UK. If it is an orchestrated dance then we may not have long to find out as it is the Mansion House speech in 24 hours or so. Will it be “the Chancellor saves the day?”

  2. I’m shocked who would of possibly thought it. If you keep adding to regularity expenses and taxes to particular industrial sectors, they will eventually offshore to somewhere cheaper and with an easier to work in environment.

    We can very easily improve our balance of payments where the EU policy is very much biased at enriching France and Germany, with France failing where their are so many barriers to running businesses and Germany doing very nicely, especially where they cheat to gain competitive advantages. This is why the single market in financial services has been consistently been blocked by France and Germany as they don’t want a UK strength in their markets. Dumping the UK / EU cheap rare energy policy so we stop exporting plant food (CO2) generation to other countries along with most of our high energy using industries. Most of these industries also have one to many productivity whereas the service sector which is replacing these jobs has a far higher percentage of low productivity one-to-one jobs.

    All businesses are looking to increase productivity and UK / EU labour is very expensive, which is why most banks these days have automatic tellers and are looking to see where they can shed labour. That is one thing that is very noticeable in Ukraine where wages are low, there is far less automation and higher numbers of staff to customers in many shops.

    UK industry needs to also dramatically up their game. If Aldi and Lidl are the VW / BMW / Mercedes of supermarkets, Tesco is definitely British Leyland and the other three incumbents not far behind. Tesco and the others (with the exception of Waitrose) are all losing market share to the Germans, who not only have a better price / quality offering, but are also much better at engaging their customers through newsletters and social media.

    • Hi Rods2

      I do not think that the UK has ever fully engaged with Europe or adjusted to the way it is run. We tend to complain about its weaknesses and treat them as something of a fait accompli, whereas it is essentially a meeting place of quite a few pork barrel policies as you see. Accordingly we should insist on free trade for financial services or simply stop it in areas which other countries benefit from. Didn’t the French many years ago make all Video Recorders (for younger readers we used to physically tape programs to watch them and it was considered quite an advance back then…) go through one customs post in Lyon?

      For that reason I am a fan of the EU Referendum as one way or another it is likely to bring focus on the issues.

  3. £7bn a month, and that’s just the deficit in goods.
    Any minute now, Dave will be telling us how trading with the the EU, and the jobs it provides, is dependent upon continued EU membership.*
    As if an area with a £7bn surplus would erect barriers!!!

    *Dave’s “renegotiation” will go as follows: none of our EU partners will cede anything of importance, but will throw him a few insubstantial scraps to cover his nakedness.
    These will form the Prime Minister’s new clothes.
    “Battling for Britain has got us a much better deal, which I can heartily recommend to both this house and the country in general.”

    Remember Gideon and the GDP/rebate fiasco?

    • Hi therrawbuzzin

      The European ideal and the Euro has been an enormous boon for the various national establishments which is why so many are in favour of it. For them a whole new panoply of well-paid and sometimes tax-free jobs has been created. So the establishment is in favour and this mostly transmits to the media which is happy to pump out such lines as “3 million jobs depend on Europe” without asking any questions.

      Which jobs? Ours or theirs?

      We have been friendly with many of these countries for decades and some for centuries so why could we not revert to dealing with them like we do our other friends?

  4. HSBC

    Hong Kong and Shanghia Bank ?

    I think this bank doth protest too much !

    if they think we’re unreasonable let them deal with the Chinese government

    They shoot people they think are crooks !

    we ride on the coat tails of the USA and the Franko-German empire will not miss us, so long as we keep buying their stuff .

    the truth is we dont need political union , we have been traders with the world and we’ll continue to trade with the world

    but it would be nice to make a bob or two.

    Wasn’t it said of the industrial revolution pioneers that the old establishment didnt like nu money and in the end they got their way…. its just turned out that the old banking establishment was just as useless as as manufacturing – both a credit to British Management at its best

    roll on the Rover group fab five !!

    bunch of pirates ? seems thats what our leaders are good at !

    Forbin

    • Hi Forbin

      As I have replied above the European ideal was great for the various establishments with the new jobs for them it created. However apart from the costs of all of this the problem for the UK was that our establishment has become fixated on Europe and ignored the rest of the world for too long.

      Look at China which is playing a long-term game based on acquiring influence over resources and commodities. What did we do? Lose interest and influence in Australia and Canada which are full of the stuff……

      In fact the problem for our establishment comes with that double-barreled word “long-term” doesn’t it?

  5. Well Shaun, thanks for drawing parallels with Turkey, most people have no idea that such comparisons can be made. I reckon normal economic rules have been suspended ever since they’ve messed with the cost and availability of money. Who can say how long it will last, I hadn’t expected manipulation to last 2008 to 2015 so it is gravity denying and as long as there are snouts in troughs why cant it go on?

    • Hi Paul C

      I think that the world changed in the run-up to the crash as we relaxed the rules and let the banks run riot. Now after the event we are struggling to apply rules. One still holds which is a falling currency leads to inflation as we have seen in Ghana, Turkey and Ukraine. But the link between trade problems and a currency can be broken as the UK demonstrates. Some of it is the policies being tried right now as the ECB and Bank of Japan push their currencies lower as we have a new phase of the currency wars.

      Of course it may just be late a delayed bomb and the UK Pound £ will take a dive after all it is hardly without precedent! But for now money still finds the UK attractive.

  6. “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. ”

    Absolutely, Shaun. The alternative to TBTF would have been much worse – for a few. Too late now for the last crisis, but will the people let it happen again? Let’s hope not.

    • Hi Eric

      The UK establishment panicked at the onset of the credit crunch. It was another fail for Bank of England Governor Mervyn King who wanted to hold a harder line but capitulated. If we had made things a lot more difficult for those in charge of Northern Rock like for example holding them accountable for their actions we would be on a better road by now.

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