It is UK trade and exports that George Osborne should be worried about

Yesterday was something of a strange day for analysis of the UK economy as the Chancellor of the Exchequer gave a rather odd speech in Wales. To get a full idea of the change I would like to take you back to as recently as November 25th for his Autumn Statement. Here is a flavour of it.

Since 2010, no economy in the G7 has grown faster than Britain……Our long term economic plan is working…..growth is then revised up from the Budget forecast in the next two years, to 2.4% in 2016 and 2.5% in 2017.

Also there was the wrapping of his optimism in the flag of the Office for Budget Responsibility.

The OBR has seen our public expenditure plans and analysed their effect on our economy. Their forecast today is that the economy will grow robustly every year, living standards will rise every year, and more than a million extra jobs will be created over the next five years.

So in short happy days were ahead conveniently funded by the OBR finding quite a lot of money down the back of its forecasting sofa. This posed yet another question for the role of the OBR which has been sucked back into the UK establishment in my view. There were opposing views such as ex Bank of England economist Tony Yates who said that such views were absurd.

Quite a change

This was a doppelganger of “yesterday all my troubles were so far away” as in the intervening 6 weeks or so there seems to have been something of a quantum reversal.

I worry about a creeping complacency in the national debate about our economy.

Do you mean the creeping complacency that you spread on the 25th of November George? Anyway let us look at his explanation.

Last year was the worst for global growth since the crash and this year opens with a dangerous cocktail of new threats from around the world.

Ah it’s somebody else’s fault! What can we do then?

2016 is the year we can get down to work and make the lasting changes Britain so badly needs….. This year, quite simply, the economy is mission critical. We have to finish the job.

This is really quite a confession as after all he has been Chancellor for over five years now so what has been happening in that period if we now need “lasting changes”? Odd when we were told only in November that the “difficult decisions” had been taken “when I presented my first Spending Review” back in the summer of 2010.

Indeed we got a warning which was not far off apocalyptic.

Or it’ll be the year we look back at as the beginning of the decline.

Actually if people were to decide the UK was in decline surely they would look back to the beginning of his Chancellorship in May 2010. But those like me who criticised the OBR back in November will be wondering what has happened to the £27 billion boost they found down the back of their sofa? It does not seem to have lasted long.

We did get a reference to monetary policy that the Chancellor is likely to regret.

Let’s be clear, higher interest rates are a sign of a stronger economy.

There are two issues here. Firstly he is highlighting something that the Bank of England has moved away from as I discussed only on Monday. The idea previously pushed by Governor Mark Carney back in June 2014 that they would rise “sooner than markets expect” or in the summer of this year that they would “come into focus around the turn of the year” is to use my song of the day so yesterday. Perhaps nobody has told George yet. Actually that critique seems to apply to the UK’s political class in general as the Shadow Chancellor John McDonnell parroted a very similar line. Also I would imagine that many of you are wondering why if interest-rates are a sign of a stronger economy we have had an “emergency” 0.5% Bank Rate for nearly 7 years!

Also if something is proving to be useless you have to big it up.

So I’ve created a powerful new Financial Policy Committee in the Bank of England

According to the Halifax UK house prices are rising at an annual rate of 9.5% whilst the FPC is wondering whats on the lunch menu?

Trade is a problem for the UK

Yesterday I exchanged some data with Andrew Sentance about UK exports and today one part of the trade figures backs up his argument.

UK export growth averaged 5.6% per year over the past 20 years, between 1994 and 2014

This is rightly called a “strong performance” but there is a rub as shown below.

UK’s export growth has been relatively low among the G7 since 2012. UK exports fell by 1.5% in 2014, the only country in the G7 to see negative export growth.

Regular readers will be aware of my argument that the Bank of England made a mistake in 2012 by rebalancing the UK economy towards the housing market in the summer of 2012 via its mortgage and banking subsidy effort called the Funding for Lending Scheme. Is it a coincidence that as the UK obsessed about house price gains our eye was not on the ball of export growth? I would argue not. There are always issues with any extrapolation so take care but the number below provides food for thought.

estimates for 2014 suggest that UK goods exports were 8.7 percentage points below their long run average.

How has this come to be? Well take a look at the breakdown.

UK goods exports, in nominal terms, have been contracting at an average rate of -1.6% since 2012, and have been at the bottom of the G7 range. In 2014, UK goods exports fell by 4.1% – the only G7 economy to see negative growth. This was also the lowest growth rate seen since 2009.

The bright light for the UK for so long has been services exports as shown below.

UK exports of services, in nominal terms, have been close to the top of the G7 range since 1994 and consistently saw positive growth. They have grown at an average rate of 7.6% in each year over the 20 year period- which was also the highest average growth rate among the G7 countries

It is nice for us to be able to bask in the pleasure in being the top of a positive league table. However here too our eye seems to have drifted off the ball.

Recent data suggests that UK exports of services slowed in 2014 compared to 2013 by 6.5 percentage points, down to 2.3%. UK exports of services had the lowest positive growth rate in 2014 compared with its G7 counterparts, growing by 2.3%.

A (space) oddity

Apologies as there are actually two. Let me open with the rather odd development that in a booming economy we seem to be importing less.

Imports decreased by £1.2 billion (1.1%) to £101.7 billion in the 3 months to November 2015

Some of that is oil but by no means all of it. Also in spite of the recovery in many of our trading partners in Europe we are exporting less as well.

Exports decreased by £0.3 billion (0.5%) to £71.0 billion in the 3 months to November 2015

A little awkward which even if we allow for lower oil prices has us mulling the fact that world trade seems to be in decline in an apparent boom.

Trade feeds into economic growth

Apologies for a statement of the obvious and let me switch to the more precise net trade feeds into economic growth. This really is something for George Osborne to worry about in my opinion. From today’s UK Economic Review.

The drag from net trade on GDP growth

As we look into the detail we see this.

This has largely been driven by the absence of growth in the export of goods, which in Q3 2015 were 1.7 percentage points lower than the average level in 2008 (as a percentage of nominal GDP), while the import of goods increased by 1.1 percentage points over the same period.

It has been a dragging anchor on the UK economy and its GDP in the credit crunch era as the latest quarter indicates..

Net exports pulled down GDP growth slightly by 0.2 percentage points, for the quarter on quarter a year ago growth, but by 1.0 percentage point for quarter on quarter growth.


This morning’s UK Economic Review sort of backs George Osborne and the OBR’s past optimistic position.

this still represents the eleventh consecutive quarter of GDP growth and continues the positive trend in rising output that started in 2013.

However the new “realism” seems to have come from this development.

Growth averaged 0.5% during the first three quarters of 2015, following growth of 0.7% per quarter during 2014.

In economic terms as we review the situation we see that according to the ONS (Office for National Statistics) analysis of this morning the issue is mainly one of trade. Odd that the Chancellor failed to point that out.

Also this is something of a record for even the hapless OBR as only 6 weeks later even the Chancellor has abandoned its forecasts. Time to put it out of its misery.

We are good Europeans

The credit for this never seems to quite arrive at our door but look what we have been doing to help the rest of Europe.

This resulted in a widening of the trade in goods deficit with EU countries to a record level of £22.9 billion in the 3 months to November 2015 compared with the 3 months to August 2015.

There is something rotten in the state of Denmark

One of the most famous quote in literature so let me apply it to the Nationalbanken which did this yesterday.

Effective from 8 January 2016, Danmarks Nationalbank’s interest rate on certificates of deposit is increased by 0.10 percentage point.

They do not seem to be keen on pointing out that it makes the new rate -0.65% so let me help out. But who outside the world of central banking thinks that a 0.1% change in interest-rates materially changes anything? It will be a long road back to 0% at this rate! Also the costs of changing interest-rates around the economy seem likely to outweigh any benefit. So let me leave you with a musical summary from the nutty boys.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain
Hey, madness, madness, I call it gladness, yee-ha-ha-ha







31 thoughts on “It is UK trade and exports that George Osborne should be worried about

  1. Hi Shaun

    What amuses me is that we have a PSBR of around £70bn and increasing private debt. This doesn’t support growth, in terms of it being an adjunct – it creates it! Is it any surprise that we have a rapidly growing economy – built on spending borrowed money? This is hardly a record to be proud of!

    In addition, and as you point out, the GDP figures are suspect as is the deflator which, to my mind, probably understates inflation by quite a stretch.

    And, as you rightly point out we still have IRs at the “emergency” rate!

    You have to admire GO for the sheer chutzpah!

    The trade aspect is really worrying and is this trend the working out of the successive hollowing out of manufacturing over the last thirty years due to globalization etc? If it is then we are FUBAR as they say in polite circles because we are not going to back to those days.

    That leaves us with “financial services” to rely on and what could possibly go wrong with becoming ever more reliant on banking?

    If you wanted to write a companion volume to Sir Thomas More’s “Utopia” and call it “Dystopia” all you’d have to do is described where we are headed and that would nail it.

    • hehe

      what did go wrong ? 2008 we had to “save the world”

      and ofcourse that was the Banks

      the only world our HMG knows or cares about


    • “Is it any surprise that we have a rapidly growing economy – built on spending borrowed money?”

      Kind of how growth has always been derived down the ages Bob.

      • Sorry, the computer dropped the rest of my post so here it is: The real problem is not the debt but it’s rate of growth and the return earned on it in terms of GDP growth.

        As for hollowing out of UK manufacturing, I remember those bad old days only too well, when things, to misquote Steve Jobs, just didn’t work.

        The UK lost it’s manufacturing bias because it was no good at mass production excepting some small areas and the far East, in the shape of Japan initially, took over because the things they make do indeed “just work”.

        Don’t even think about Germany as the UK was never ever in that class of engineering.

  2. The balance of payments, rising personal debt, rebalancing the economy and ever rising house prices are talk about, but nothing is being done to address these fundamental problems in the U.K. These issues, if not resolved, will eventually cause one the biggest economic collapse we have ever seen in this country. But, taking the necessary measures does not gain votes, so don’t expect any action any time soon!

  3. Thanks for your posting Shaun , a beacon of rationality in a insane world

    as for the Danes – it made little difference on the way down so why would it make a difference on the way up? after all the FED did a 0.25% increase and the sky did not fall

    And for the BoE , Masterly inaction or just plain old incompetence ? either way its a case of I’m alright Jack .

    Why anyone in MSM believe anything that Osborne , the OBR or the ONS say is frankly scandalous !

    Roll on the recession of 2016 !

    pass the QQEE please !


    To be sane in an insane world is a sign of madness

    “The Lunatics (Have Taken Over The Asylum)” – Fun Boy Three [1982]

    • Hi Forbin

      I always liked that song and perhaps was getting ready for now even in my youth :). I am not sure I realised how completely they would do the job though! Although for perspective Yes Minister tells us that many of these things have been in play for 30+ years.

      “To be sane in an insane world is a sign of madness” seems like it should be in Joseph Heller’s Catch-22.

      Underlying this – I mean differences of opinion – is the demise of the media. What I mean by this is that the new BBC Economics blog seems to judge success but giving readers Osborne’s speech as few hours early. Whereas economic analysis such as hang on why is he talking about an interest rate rise when the Bank of England has moved away from it is absent.

      There is a new BBC blog on the Far East and China which I contacted with some suggestions as it was – and I didn’t say this- rather superficial but I have not received the courtesy of a reply from Karishma Vashwani.

  4. George Osborne’s speech was very timely and much needed. It was a political speech more than an economic one.
    He was, in effect, reminding the voters that the deficit still has to be reduced and hopefully even the debt.
    If you listen to the BBC (where @70% of people receive their economic news), then every problem can be solved by greater Government spending, there is no mention of the downside to greater Government deficit and debt.
    I have never even seen anywhere, an analysis of the effects of an IR increases on Government debt; perhaps you could produce one?
    What will happen to the UK, when the next world recession occurs?
    So, George Osborne’s speech was a reminder to voters that more Government spending can lead to disaster.
    I know Shaun that you try to avoid politics, but in a democracy the two are interwoven. If you ignore politics then your economic analysis is always likely to prove too simplistic.

    I do agree with you that the balance of payments is a very real problem, but how much has be caused by politics? How much has the decline in North Sea oil and the reduction in size of the banks affected the balance of payments?
    We seem to be living in a society, where we do not wish to solve our problems, but live in a cosy world and cling to the past and refuse to try anything new.
    Here are some examples of the “new” which could help the balance of payments and the economy,
    Fracking Shale Gas
    A 3rd and 4th runway at Heathrow
    Stop the attack on the banks
    Maybe, even dredge the rivers (and put the silt on the banks – thus heightening them), allow farmers to clear their drainage ditches and throw in the bin all the regulations stopping this happening.
    For the longer term improve education – I remember being test on the multiplication tables at 7 or 8
    not 11 as per a recent proud announcement.
    So,yes, George Osborne’s speech was a welcome reminder (in contrast to the budget which was appealing to the fact that progress has been made) that as a nation we have to try harder to be competitive and to not sink into a complacent attitude that all is well.
    That is the trouble with politics, it is difficult to say we have to try harder, as well as conveying a message that we are making progress and thus producing a “feel good” factor that encourages us to try harder!
    I do enjoy your blog and read it regularly!

    • “What will happen to the UK, when the next world recession occurs?”


      we have no plan B and I really do doubt there was ever a plan A!

      from what I’ve read by 2020 the oil deficite would be 22BilllonGDP ( with oil at $100, so really the drop in oil prices is much better for us!! )


      • I think plan A involved stimulating the economy by encouraging as much personal debt as possible coupled with allowing cash withdrawals from your pension pot, stoking up property prices etc. All pretty desperate stuff if you look at it from a historic perspective. The next recession is looking increasingly close, so as you observe it’s hard to see what’s left as a plan B.

      • Look at the overseas trends. Germany is constructing bicycle freeways, in California the take up of of overpriced electric cars is so high that competition for charging spots is causing buckaneering behaviour.

        In general I regard electric cars powered from coal generated electric as a fraud and a farce, but there are applications that really do reduce carbon – notably the university’s solar car race across Australia Solar panels that charge electric car batteries are modestly useful.

        With floods in Missouri & recent droughts in California – I suspect US policy will try to decarbonise except in the unlikely event of a Trump presidency. Also note that reduced US oil imports / energy independence has a side effect of weakening oil-exporting geo-political rivals.

        A 1970’s style oil crisis will have less effect in developed economies, due to reduced energy intensity per unit GDP.

    • I have never even seen anywhere, an analysis of the effects of an IR increases on Government debt; perhaps you could produce one?
      Govt debt is issued as bonds, where the interest rate if fixed for term.

      • I think there is.

        As interest rates increase (i.e. the money markets demand a higher premium for lending to a Government as they become more nervous about buying said Bonds for fear of default) so Government revenue is eroded as more revenue has to be stumped up to meet the coupon on the bonds. As revenue falls further due to debt servicing so markets become even more nervous about lending to the Government and demand even higher premiums.Thus you have a vicious circle – think Greece and then we enter the wacky world of QE, which is a topic all on it’s own.

        • It really is too late for me!! I forgot to answer the point!!

          So what happens to Government debt in the face of rising interest rates is that the Government borrows even more to to service the interest payments, therefore the effect on Government debt of increased interest rates, ceterus paribus is that the debt increases.

          I’m going to bed now.

    • But not all Government borrowing, or indeed any borrowing, is bad; it depends entirely on what it is spent on.
      Indeed, you actually make the point….dredging rivers, improve education (yes, again as you point out, REALLY improve it; I also remember knowing my tables by 7-or else severe trouble!). The UK infrastructure is disintegrating, and needs repair/replacement.
      However, I disagree on the banks. The banks have engaged in what would be called “racketeering” in the USA….fraud, “fixing the odds”, market manipulation, money laundering…..and the rest! If the banks wish to leave the UK because they will no longer be allowed to do this, we should buy them the ticket!
      Of course, it would have been better if the banks had not been “saved” (at everyone elses expense), but allowed to go down. As with all insolvent businesses they could then have been bought by those who could run them properly and profitably. Oh, and the directors could have been prosecuted for trading whilst the company was insolvent, and the veil of incorporation lifted so they were personally responsible for the debts. That would concentrate minds for the future…..

        • That is because the price is associated with risk, and little else.
          We have seen a huge spread between the price of German and Italian debt at nominally the same CB interest rate.

        • Interest rate demanded (on new issues which then affects the price of secondary market bonds) is the expression of perceived risk.

          If the market doesn’t like the interest rate offered on new issues it won’t buy it, the Government withdraws the issue and re-issues at a higher rate .

          This rarely happens in practice as the Debt Management Office looks at prices of bonds of similar duration in the secondary market to those about to be issued determining the rate up or down accordingly. The price of new debt is therefore always 100 (albeit at a higher or lower rate) whilst the price of secondary market bonds with their attendant old interest rates continues adjusting up or down according to perceived risk.

          The spread of which you speak in price between German and Italian bonds at the same interest rate is because of CB interference with the market pricing mechanism via QE which, as I said a couple of days ago, CB’s everywhere should leave markets alone because interference leads to under and over valuations depending on CB action which in turn leads, eventually, to severe market volatility.

    • Hi Nick

      Thank you and I just wanted to reply on this point.

      “I have never even seen anywhere, an analysis of the effects of an IR increases on Government debt; perhaps you could produce one?”

      In essence my career has seen bond yield falls as a trend with occassional upticks. Newer media and finance people have only seen falls.

      The UK mostly (~75/80%) issues fixed rate debt so once issued that’s the cost. Where is gets affected in a bond yield rise is new debt and we do quite a bit of that these days. The other 20/25% is mostly index-linked debt which is more complex but would in general be more expensive too although the issue of inflation costs may or may not change. But in short it would cost as opposed to the ( rarely mentioned outside of here) windfalls that so many governments have received often as a result of policies from “independent” central banks.

      • Shaun
        With regards to the cost of Government debt, I was thinking of a longer time span than just existing bonds.
        As I understand most of Government debt is relatively short term (10-20 years), so that whilst we can afford the repayment now (at emergency low interest rates), what will happen in the future when we have to issue new bonds to cover the old ones (at normal, higher, rates)?
        I raise this issue, because there is pressure to borrow now, on low interest rates, but no thought for the future about the subsequent cost.
        Also the idea that George Osborne should actually run a surplus as laughed out of court by the media.
        Just to forestall the argument that “investment” is a good reason for the Government to borrow, ask yourself if a private investor would consider to put their money into the “investment”. If not, then it is most probably just normal Government expenditure not investment!

    • Hi Nick,

      I’ll question “the attack on the banks”. Profitable banks which pay taxes should be encouraged. But bust banks which require subsidies should be simply left to go broke – typically broke businesses get sold off and most employees keep their jobs. Subsidies aren’t an attack on the banks -> but subsidies are making the UK public poorer.

      There is a piece in the BBC where the regulator denies being soft on the banks.
      (Correct, being slapped with a wet bus ticket is less than soft …)

      • You make a perfectly reasonable point about the banks but, unfortunately, simply letting them go bust is fraught with problems. The main one is that no one will any longer have confidence in the banks and that may result in an end of life as we know it; confidence in the currency and banks is almost the keystone of our economic life.

        My chagrin is no less than yours but we have to accept that the banks are, indeed, different and banks need special regulation and insolvency resolution procedures; just letting them go bust may be a case of the cure being worse than the disease.

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