Today brings together two themes of this website. We have the long running theme of the UK’s persistent and indeed at times chronic trade and current account deficit. Also as we have the figures for July we will learn a little more about the post EU referendum economic situation. However care is needed as the fall in the UK Pound £ from around 87 on the effective or trade weighted exchange rate to 79 will first make things worse rather than better as the price of imports rises. This is the first part of the J curve effect which later has a (hopefully) stronger effect as exports rise due to an increase in price competitiveness. Actually the J curve misses a more longer-term effect which will happen if inflation persists in the UK economy and erodes the benefit of the more competitive exchange-rate happened post the 2007/08 depreciation as the Bank of England looked the other way.
There is one other effect ignored in the economics text books which is that some contracts will be at the old price for a while. This of course makes the picture even more complicated.
We get some insight into the situation by looking at Germany which has already produced some trade data today. What we see as we look at Germany is to a large extent the opposite of the UK. According to the German statistics office they exported some 89 billion Euros of products to the UK in 2015 but only imported some 38 billion Euros in return which is quite a gap. According to Allister Heath Barclays have done some research which gives another perspective to the situation.
Their key revelation is that Germany’s current account surplus with the UK is now worth a massive 1.7pc of German GDP and 20.4pc of its total surplus.
Symbiotic or parasitic? The latter view comes if you consider the Euro to be a project designed to cheapen the cost of Germany’s exports which if you consider where the Deutschemark would be right now seems quite a gain. If there had been a Dm now this would not have happened.
The country’s nominal exports to the UK increased by 50pc between 2010 and 2015. No less than 7.5pc of all German goods exports were sold to Britain in 2015,
Current Account Problems
The July Economic Review for the UK put the situation bluntly.
The current account deficit narrowed marginally between 2015 Q4 and 2016 Q1 (figure 9), from 7.2% to 6.9% of GDP. The current account deficit at the end of 2015 remains the highest, as a share of GDP, since records began.
This however depends on the UK statisticians being correct about this.
Since 2011, the rate of return on UK assets abroad has been falling, and so the income earned from UK assets held abroad has come down sharply, despite the UK’s holding of assets abroad being relatively stable……..Conversely, the return on UK assets held by foreign owners (debits) has been much more stable,
There are all sorts of possible issues here with the numbers which depend on a lot of assumptions and estimates. Here is something from the August Review which stands out to me.
In 2015, the rate of return stood at 5.3%, which was 1.4 percentage points higher than in 2011. An improvement in the rate of return EU investors generate on their UK FDI assets,
This is not repeated by other investors in the UK and we are in fact seeing lower returns on where we invest. Also interest-rates and returns were falling through this period so I would be checking those numbers with a fine tooth comb. It is of course possible that investment from the EU to the UK has been made by those with great skill but let’s be sure.
Just like the Beach Boys it gets around.
The methodological improvements implemented in Blue Book 2016 have had a small impact on the current account position, through inward and outward imputed rental on second homes.
Perhaps they should sing along to Gnarls Barkley.
Does that make me crazy?
Does that make me crazy?
Does that make me crazy?
This had a very familiar bass line.
The UK’s deficit on trade in goods and services was estimated to have been £4.5 billion in July 2016, a narrowing of £1.1 billion from June 2016. Exports increased by £0.8 billion and imports decreased by £0.3 billion.
This has been translated by the media as a success post the referendum vote. If they are going to copy and paste stuff they should choose a brighter source as the numbers are very erratic and as I pointed out earlier it takes time for prices to change. Unless the ships below were both ordered and built on fast forward.
Exports of ships increased by £0.5 billion
The UK Pound had been drifting lower for a while so the quarterly figures should on the logic above show a bigger gain right? Er….
Between the 3 months to April 2016 and the 3 months to July 2016, the total trade deficit for goods and services widened by £5.1 billion to £14.0 billion.
This widening was pretty much entirely in the goods sector.
Between the 3 months to April 2016 and the 3 months to July 2016, the deficit on trade in goods widened by £5.0 billion to a deficit of £36.0 billion. Exports decreased by £1.6 billion (2.2%) and imports increased by £3.3 billion (3.2%).
After all the obsessing over our relationship with Europe it is hard not t have a wry smile at the major cause.
Between the 3 months to April 2016 and the 3 months to July 2016, the UK’s trade in goods deficit with countries outside the EU widened by £4.8 billion to £12.5 billion, attributed to a decrease in exports (6.8%) and an increase in imports (4.5%).
A driver of this is something rather awkward if we look at why exports fell.
This decrease was mainly attributed to a £2.8 billion fall in unspecified goods (of which non-monetary gold is the key component).
Without it they would have risen on the quarter. We need to have a think about this which mostly represents in fact changing a label on gold held in the vaults of the Bank of England. This is another “improved” methodology and particularly affects the UK as we have the London Bullion Market. Of the many problems here I would say the largest is simply that there are many clear incentives for the numbers provided to be inaccurate.
What we do know about the UK trade position is that it has been troubled for some time. I do not think that there has been much doubt we have been in deficit as for example that is consistent with the way that over time the value of the UK Pound £ has fallen. But the size of the deficit is in doubt and there are two main areas. Firstly it is good that the official statisticians are acknowledging the issue but there are problems with the numbers for the service- sector which of course is very important for the UK.
Information on trade in services is mainly obtained from quarterly surveys, in some cases underpinned by larger annual surveys. This means that the latest months are uncertain.
Also we see that the movements in other sectors of the current account such as investment income and non-monetary gold are not clear cut either. This just adds to the list of problems I have pointed out in the past for the economic output numbers as represented by Gross Domestic Product or GDP.
This is me from earlier this week.