Today is the day we get a reminder of the parlous state of the UK trade and balance of payments position. I was reminded of this earlier this morning as I listened to Bloomberg Radio in advance of going on air. One of the topics was the forecasts of a fall in the value of the UK Pound £ in 2016. Nice of them to catch up with us here although of course it is lower now than when we opened the year! The value of the UK Pound £ and the balance of payments are inextricably linked albeit that until recently the foreign exchange markets have turned a Nelsonian style blind eye to it. As Kristin Forbes of the Bank of England reminded us in October 2014 the UK is particularly dependent on the relationship.
Traded goods and services constitute over 60% of the UK economy. Currency movements directly affect the competitiveness of exports and import-competing domestic firms, and therefore production, employment, and profitability in both of these sectors. About 80% of sales by companies in the FTSE 100 are earned overseas…… About 30% of the main price index is imported goods.
There is a good news story here in that we rarely give ourselves enough credit for the way we are a trading nation. However we have developed the habit of running persistent deficits which again if you wish to be on the glass half-full side is that we provide demand for our trading partners. A consequence of this can be seen in the foreign exchange markets as Kristin pointed out, when our currency moves it tends to be substantial.
Sterling has fluctuated within fairly narrow bands since 1990, punctuated by four large movements. Sterling depreciated sharply when the UK left the ERM in 1992 (by 20%) , and even more sharply during the recent financial crisis (by 27%). The pound appreciated quickly between mid-1996 and late 1997 (by 27%), and then most recently from March 2013 to July 2014.
Hence the phrase “sterling crisis” although if we look through the recent dip the most recent big move has been higher.
The UK February Economic Review told us this.
The UK’s trade deficit was, on average, 2.7% of GDP between 2006 and 2010, falling to 2.0% between 2012 and 2014.
If we look at this geographically then we see that it is a story of two halves.
The two geographical areas have diverged, so that in 2014 the trade deficit with the EU stood at 3.2% of GDP while the UK had a surplus of 1.4% with non-EU countries.
We have made progress outside of Europe but within it we have done badly and particularly so with some countries.
However, the more recent decline in the EU trade deficit has been concentrated in Germany and the ‘Benelux’ group of Belgium, the Netherlands, and Luxembourg. Together these four countries contributed 1.3 percentage points to the 1.9 percentage point decline in the EU trade deficit as a share of GDP between 2011 and 2014.
I somehow doubt they will be as indifferent to the UK leaving the European Union as some claim do you?!
How does this impact economic growth?
The UK Office for National Statistics was trying to put a positive spin on things above but you see the reality is that out deficit drags on our GDP (Gross Domestic Product) figures. If we come more up to date than the 2014 above we see this.
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. Net exports have exerted a modest drag on GDP growth since the recession, though within that there has been some volatility in the contribution from net trade.
The improvement recorded above seems to be “volatility” now! I think we know where that is going.
One area that has not been volatile and remained a good news story is the service sector.
From Q1 2011 the balance of services made a significant positive contribution to the reduction in the trade balance, averaging 1.4% of GDP above the 2008 average.
However the goods trade position has been both volatile and overall worse as we export less and import more.
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.
We got the first hint of the data for 2015 as shown below.
The December 2015 UK trade release is the first opportunity to analyse 2015 as a whole. The UK’s annual trade deficit reached £34.7 billion in 2015; a widening of £0.3 billion from 2014. Over the same period, the goods deficit widened by £1.9 billion to £125.0 billion. The widening was partially offset by an increase in the services surplus, which rose by £1.5 billion to £90.3 billion.
As you can see the situation is pretty much unchanged especially if we allow for the wide margins of error that even annual trade figures require. As the economy grew we may well have done slightly better but again this is well within the error margins. Also within the detail there were some troubling indications.
In 2015, total trade exports decreased by £1.0 billion to £512.4 billion. There was a £8.1 billion fall in exports of goods, which was partially offset by a £7.1 billion rise in exports of services. Total imports decreased by £0.7 billion to £547.2 billion over the same period; imports of goods fell by £6.2 billion and was almost entirely offset by a £5.5 billion increase in imports of services.
Not much sign of a “march of the makers” or indeed “rebalancing” as exports of good fell! Added to that we have an odd situation where in a boom we imported fewer goods which is odd! Perhaps we are beginning to import less or the numbers are wrong again. We will have to wait and see. You may also note the further rise on the service sector. I welcome this but there is a caveat which is that in a 29 page release they account for only 4 pages and they only reached that amount by repeating bits. Still it is better than the 1 page we used to get so I seem to be having an impact.
Also the oil situation has complicated things which accounts for the fall in exports and imports of good on reflection. The problem with excluding oil exports and imports is that we counted them on the way up.
The quarterly numbers have changed since the second quarter had some proclaiming a triumph and turn-around. These claims appear from time to time and sadly each one has faded away.
In quarter 4 (October to December) 2015, the UK’s deficit on trade in goods and services was estimated to have been £10.4 billion; widening by £1.8 billion from quarter 3 (July to September) 2015.
Putting it another way the situation in the last quarter of 2015 subtracted 0.2% from economic growth. There was some good news in the fact that exports were 2.8% higher than the year before but this was drowned out by a faster rate of growth of 3.5% in the larger imports total.
If there has been a clear decline in UK exports in recent months it appears to be showing up most in the chemicals sector.
We now have the picture for 2015 and whilst the unreliability of the numbers means it is a little out of focus it looks as though the beat goes on. We have improved our export performance if we exclude the oil impact but guess what we have pretty much offset it with imports. So we remain excellent members of both the European and world economy as we provide plenty of net demand. But for ourselves we see a continual drain on our own numbers as we record deficit after deficit. This leaves us vulnerable to scare like this.
A large portion of this weakness appears to be a result of the balance on Foreign Direct Investment (FDI) income. The contribution of FDI to the current account balance, which has traditionally been positive, has fallen in each year since 2011,………Measured as a percentage of nominal GDP, the indicative current account deficit in 2014 is the highest on record (4.5%).
Now some of that is at the stroke of a statisticians pen as assumption changes can be reversed. But we are at risk of a scare which shifts to the currency especially if economic growth continues on an apparent slower path. The catch is that you can make cases for quite a few currencies falling right now and as the Bank of Japan is discovering the situation is both fluid and complex.
Last night it issued what you may consider a liquidity statement or perhaps a dividend one. Either way you may enjoy this from @timmyconspiracy.
1 take out loan from Deutsche Bank
2 hope they inadvertently shred the paperwork with everything else before the receivers arrive