Today is Bank of England day and in a nice coincidence it is also the day for the latest trade figures. It was only on Tuesday that I pointed out that the UK economy is having its best period in the credit crunch era of recorded economic growth, lower inflation and real wage growth. However if they are the ying, the yang of the UK economy is the housing market, troubled public finances and a consequence of the two which is our current account deficit. Putting it another way our consumption boom described below which began in early 2013 is having familiar consequences.
Year-on-year estimates in the quantity bought in the retail industry show growth for the 30th consecutive month in October 2015, increasing by 3.8% compared with October 2014.
So good but the way we are outperforming most of our neighbours and especially the troubled Euro area poses further questions for our chronic trade problems.
What does the Bank of England think?
The Financial Policy Committee had some thoughts on the subject in the meeting minutes it published yesterday.
In recent years, the UK current account deficit had been large by historical and international standards.
It also warned about potential risks.
As the FPC had noted previously, a persistent current account deficit could lead to a sudden adjustment in capital flows or a depreciation of the exchange rate, with adverse consequences for UK financial stability.
So is it on the case? Not really.
Since the Committee last met in September, risks from the current account deficit appeared to have fallen back a little. The deficit had narrowed in 2015 Q2 to 3.6%. In part, this was probably driven by temporary factors.
Odd that they seem to have missed the fact that the UK current account deficit widened again in the third quarter! The bit below has all sorts of issues.
While the widening in the current account deficit since 2011 had coincided with a fall in net saving by the UK private sector, that had not yet been associated with significant growth in overall lending to households and companies.
You may note that on a longer perspective the problem they dismissed has reappeared! Many would argue that a widening current account deficit combined with less saving is an example of two of the “imbalances” in the UK economy that the Bank of England has warned us about often. Perhaps they forgot this. Also if we look at unsecured lending to households it is rising at over 8% per annum so I guess “significant growth” finds its way into my financial lexicon for these times.
It did however have time to slap itself on the back whilst blowing its own trumpet like OMI “Oh, I think that I’ve found myself a cheerleader”
Nonetheless, the Committee noted that the ease of financing the current account deficit rested on the credibility of the United Kingdom’s macroeconomic policy framework and its continuing openness to trade and investment.
Meanwhile in the real world
Today’s data release was sadly yet another grim one for UK trade. Let us open with the headlines.
The UK’s deficit on trade in goods and services was estimated to have been £4.1 billion in October 2015, a widening of £3.1 billion from September 2015. The widening is attributed to trade in goods where the deficit has widened from £8.8 billion in September 2015, to £11.8 billion in October 2015.
Even the FPC will struggle to record lower risks from such numbers. If we look into the detail we see an illustration of my concerns about the UK consumer boom feeding into weaker trade numbers coming to fruition.
The trade in goods widening was mainly the result of a large increase in imports of goods; up £2.3 billion to £35.4 billion between September 2015 and October 2015. This increase mainly reflected a rise in imports of finished manufactures of £1.1 billion.
It could not be much clearer but as ever it is important to recall that monthly numbers are particularly unreliable and erratic so lets us look for more perspective.
In the 3 months to October 2015, the UK’s deficit on trade in goods and services was estimated to have been £8.4 billion; widening by £2.4 billion from the 3 months to July 2015.
This was in essence all about the trade in goods.
Between the 3 months to July 2015 and the 3 months to October 2015, the trade in goods deficit widened by £2.5 billion to £31.6 billion. This widening was mainly attributed to a £1.6 billion fall in exports of fuel and a £1.3 billion rise in the imports of machinery and transport equipment.
The numbers for oil exports are particularly odd as we are told in other releases by the Office for National Statistics that oil production is booming!
oil fell by £1.7 billion (27.9%) to £4.5 billion. Crude oil decreased by £1.1 billion (34.5%) to £2.2 billion and refined oil fell by £0.6 billion (20.6%) to £2.3 billion
If it is the oil price fall impacting this then we should also be seeing falls in imports of oil too as we are a net importer these days but the influence there seems to be much smaller.
the increase was partially offset by a fall in oil imports, down £0.7 billion (8.5%) to £7.2 billion
We are good Europeans
We have been doing our best to reflate other economies in Europe via boosting their trade balance for some time now.
In the 3 months to October 2015, the deficit on trade in goods with EU countries widened by £0.9 billion to £22.3 billion…….Between the 3 months to July 2015 and the 3 months to October 2015, imports from the EU increased by £1.0 billion (1.9%) to £56.4 billion.
At the moment Germany has particular reason to be grateful to us.
In the 3 months to October 2015, there were record imports from Germany, increasing by £0.4 billion to £15.8 billion,
There were also record imports from the Czech Republic and Slovakia.
As you can see the Bank of England’s FPC wins a prize for “complacency R us”. In fact the FPC looks ever more a waste of time and a job for the boys and girls. It says it is “vigilant” in the same way it is with buy to let mortgages and then goes to lunch. However this is an area of concern for the UK economy as we continue to record deficit after deficit and there are signs that to recycle some headlines from decades past the consumer boom has “sucked in imports”. If we move to the Bank of England its traditional response to this was to raise interest-rates which links to today’s decision by it and if you believe its rhetoric a move “around the turn of the year” is in play. Trouble is who believes their rhetoric anymore as Forward Guidance has become misguided.
The implications of this are that trade via the net trade component will continue to be a drag on our economic output and GDP (Gross Domestic Product). From our third quarter GDP report
The only negative contribution to GDP came from net trade which contributed a negative 1.5 percentage points, its weakest contribution on record,
If this keeps growing it may well end our boom and it poses another question. How can the UK Pound £ continue to be so strong in the face of all of this? We have existed on capital inflows for a while now especially as money floods into our housing market. I guess it is simply a sign of how troubled things are and how any hint of yield or a positive return drives a currency higher these days.
I have written before about how little we know about our services performance which is a big deal because it is by far our best trading sector. I hope that it is doing better than we record but the truth is we are very unsure. Looking at this was one of my suggestions to the Professor Sir Charles Bean Review of UK Economic Statistics but so far there has been no response. Even worse there is continuing trouble in the goods trade numbers which we have a lot more detail on.
Due to a series of errors during 2014, the UK Statistics Authority suspended the National Statistics designation of UK trade on 14 November 2014.