Posts Tagged ‘Balance of trade’

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The pound fell to a three year low against the dollar this week. At the time of writing there are 1.4949 dollars to the pound, and many have hit the panic button. They say a crash in sterling is in sight. Are they right?

The current dollar pound exchange rate is low, but it’s far from being a record. It was lower in 2009, and in the mid-1980s went close to parity with the dollar. There are two reasons to fear for sterling, and indeed the consequences of a fall in the pound. But there are reasons for less pessimism, indeed even optimism too.

Reason number one is the Fed. If good news on the US economy continues it has said it will start cutting back on its quantitative easing programme this year, halt it altogether next year, and up interest rates in 2015. If this is indeed how it pans out, as US rates rise, money might well flow into the US from the rest of the world. Many central banks may respond by upping rates.

Because of the high level of household debt we can’t really afford higher interest rates in the UK. The Bank of England may have to choose between upping rates to stop a rout on sterling, but creating massive hardship for households with high debts in the process, or just accept a much cheaper pound relative to the dollar. Just bear in mind, however, that this problem is not unique to the UK, and if rates rise in the US, the pound may fall relative to the dollar, but stay firm relative to other currencies, such as the euro.

Reason number two is more serious. In the UK we are used to imports of goods and services being greater than exports, but at least income from investments flowing into the UK tends to be greater than income flowing abroad. But there are signs that this is changing. The UK’s net investment income has been negative in three out of the last four quarters. The story here is complicated.

The value of investments held by foreigners but relating to the UK is much greater than British investments abroad. But UK investments held abroad tend to be higher risk, and generally provide a much higher return; there are signs this is changing, however, and that is a worrying development.

To be clear, if net investment income continues to be negative this will put pressure on sterling relative to most foreign currencies, not just the dollar. On the other hand, a cheap pound may be good for exporters, although it will be bad for inflation, and may extend the period of time in which wage increases lag behind inflation.
But this may not occur, not at all.

Take the latest trade data. In the latest three months the value of exports to China was 17 per cent per cent higher than the average 2012 quarterly level. Import values from China were little changed, so the trade deficit with China, which had averaged £5.2 billion a quarter in 2012 shrank to £4.8 billion in the last three months.

Historically, the UK runs a trade in goods surplus with the United States. That rose in the latest three months. The value of exports was 5 per cent higher than its average 2012 level, while imports fell by 8 per cent. In the three months to the end of May, exports to non-EU countries increased by £1.7 billion while imports increased by £0.9 billion.

There is another reason for optimism, there signs that the UK is on the march to recovery. See: UK recovery: the reasons why and why not 

There is one big danger however. The UK does suffer from a disease. For too long money has flowed into supporting the housing market – though not house building – but there are few signs this is changing.

Remember, the strength of sterling tends to tell us how strong the economy is. If the economy does well sterling usually rises. In a way, the value of the pound is like the UK’s share price.

Right now, company cash holdings sit at around 20 per cent of GDP or at a 25 year high. If this money is used to fund investment, then the UK may boom. If instead, companies hoard their cash, banks focus on parking cash sitting in deposit accounts in mortgages, and the government focuses on trying to get house prices rather than investment up, the UK’s share price – or if you prefer to put it these terms, the value of the pound – will come under new and prolonged pressure.

© Investment & Business News 2013

The headline figure was nothing to write home about, but drill down and maybe there is reason for real optimism.

The UK’s balance of trade in goods barely moved in March, with the deficit coming in at £9.1 billion. So far, so indifferent.

As for the UK’s deficit on trade in goods and services, this was marginally better than February scoring £3.1 billion from £3.4 billion the month before. Okay that was an improvement , but actually the deficit for March was pretty close to average over the last year or so.

The deficit has not significantly changed over the last ten years. Now, change the perspective, and look outside Europe. Exports to the US soared 21 per cent in March over the month before.

Exports to the BRICS have been steadily rising for some time. See this chart:

Okay, exports to China are still way below imports from China, but the chart makes it clear that exports have been growing much faster than imports for some time. In fact over the last two years, exports from the UK to China have increased by half as much again. Imports from China to the UK have risen 10 per cent.

© Investment & Business News 2013

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It was the biggest UK trade deficit since last August, but maybe there was a glimmer of hope in the figures.

The UK trade deficit was £3.6 billion in February, compared to £2.5 billion in January. That was not very good. In fact you would need to rewind the clock to August last year to find the last time the monthly deficit was so bad.

The deficit with the EU rose, but worryingly so did the deficit with the rest of the world.

Forget about the month on month data, it is not usually very reliable. Instead look at the last three months. During this period exports to Germany fell by £677 million, and by £670 million to the Netherlands. Exports to Sweden were down by £211 million and down £97 million to the US.

On the other hand, the UK exported £326 million more to Belgium/Luxembourg, £262 million more to China, and £101 million more to Italy.
As for imports from the US, the three month period saw something of a crash, with imports from the US falling by £490 million. Imports from Italy, Belgium/Luxembourg and Germany also fell. Imports from the Netherland, China, Norway and Spain all rose. It was good to see exports to China rise faster than imports from the country.

On the other hand, total UK exports to China during the three month period were £2854 million. Imports were £7759 million, so the UK has a long way to go to bridge that particular deficit.

The trade figures may contain some bright points, but overall they are not good. But why is this the case when sterling is so much cheaper? You can see why the deficit with the Eurozone is worsening; after all, the region is going through an even more torrid time than the UK, but why have exports to the rest of the world fallen?

A falling pound does not seem to be working. What the UK needs is investment, and that can probably only happen if QE is directly more specifically at companies.

©2013 Investment and Business News.

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