Posts Tagged ‘sterling’

In November, UK exports to Ireland were worth £1.45 billion. We sold £2.09 billion worth of stuff to the Netherlands, £1.785 billion to France, and £1.21 billion to Belgium/Luxembourg.

In short, UK exports to its nearest neighbours were worth around six and a half billion pounds in November.

Exports to China were worth just £840 million.

Alas, data for November is not available yet, but In October, exports to Brazil were worth just £207 million, to India they were worth £397 million and to Russia £381 million.

In short, the UK sold almost more goods and services to little old and deeply troubled Ireland than it did to all the BRICs put together.

Be grateful for small mercies. At least it was a case of almost as much. Until recently, exports to Ireland were trouncing our combined exports to the BRICs.

But now take a look at Germany. In 2011, 59.2 per cent of German exports were to countries in the EU, which was a 20 year low.

According to ‘Spiegel’, in 2012 growth in exports outside the EU will make up for the decline in exports within the area.

‘Spiegel’ stated: “German exports are set to hit a new record for 2012 as strong sales to the US and emerging economies like China offset falling demand from austerity-hit Europe. Exports rose 4.3 per cent in the first 11 months, thanks to a jump in sales outside the crisis-hit Continent.” See: German Exports Seen Hitting New Record in 2012 http://www.spiegel.de/international/business/new-record-for-german-exports-expected-for-2012-despite-euro-crisis-a-876296.html

According to the ‘China Daily’, unit sales of cars in China are now greater than sales into Europe. It quoted a Germany analyst predicting that it won’t be long before the Chinese auto market is bigger than that of Europe and the US combined. See: Vehicle sales overtake Europe in 2012 http://europe.chinadaily.com.cn/business/2013-01/10/content_16100482.htm

You don’t need a PhD in anything to know that Germany will do rather well out of the exploding Chinese auto market.

We can speculate as to why. Here are a few observations.

Germany is benefiting from the euro. Because it shares its currency with the likes of Greece and Spain, its currency is much cheaper than it would be if it still had the Deutschmark.

The UK may be losing out thanks to North Sea oil and the City. Both bring in tax receipts. But both push up sterling.  It’s hard to say whether that is a net positive or negative.

The Bank of England is worried about the strength of sterling, and may well use QE to try to push the pound down later this year.

If Scotland does indeed gain independence, it will probably stay in the sterling area. Scotland may benefit from North Sea oil tax receipts, but North Sea oil will also have the effect of distorting the value of sterling. That means the rest of the UK will pay the price of North Sea oil via a terms of trade disadvantage, but won’t gain the benefits. That won’t go down well.

But here is a question.

Given the UK’s ethnic diversity, why is it not able to use its pool of labour with its global roots to sell worldwide? Is the problem that this potentially world class sales force, doesn’t have enough to sell?

©2012 Investment and Business News.

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So what do you think will happen in 2013?

Setting aside Galbraith’s comment about the only redeemable benefit of economic forecasting being that it makes astrology look respectable, here are some thoughts for you to ponder.

Zombies may be in the news in the summer. A new film is coming out called World War Z, starring Brad Pitt. It is about zombies. In 2012 zombies were in the business pages too. There are households, many of whom are stuck in forbearance; around 5.8 per cent of home owners, according to the FSA. There are zombie businesses kept alive by rock bottom interest rates, and banks terrified to value their assets in accordance with what the markets think they are worth. If banks did revalue their assets in accordance with market values, and applied what’s called mark to market accounting, we could see another banking crisis. So either the markets are wrong, and banks are merely refusing to let their hysteria reflect valuations, or banks are pretty close to becoming zombies – if they are not already, that is.

Meanwhile, the poor old can is already starting to look very beaten up. Yesterday, US members of the House of Representatives kicked the can down the road. They voted to raise some taxes, but delayed deciding about spending cuts for two months. Next, they have to agree on the US debt ceiling. If they don’t, the US government will have to default. They probably will, and it probably won’t, but the wire will get a visit as the US economy goes down to it, and the can will get kicked some more.

In Europe, politicians will do much the same thing – that is to say at the last minute agree to various rescue schemes, but only as temporary measures while they consider at their leisure what to do to fix underlying challenges. They will never decide of course, but they will have lots of late night emergency meetings.  The German Constitutional Court will have to decide whether various new schemes are legal under German law, and will finally announce provisional approval of the latest German backed rescue scheme, but say it needs more time to decide for sure.

So is there a word to describe US and EU governments that just delay the real decision making process, and apply sticking plasters? Well how about this word: zombies.

One prediction for the year ahead is that as World War Z is released we will see a barrage of media comment, and indeed cartoons, comparing the economy with that film.

Also in 2013, governments and central banks in the US, Japan and the UK will decide it is time to target nominal GDP rather than inflation. The result will be more QE. Sterling may come under pressure, especially against the euro, although the Bank of England may well say this is a good thing. Holiday makers won’t be too chuffed, however.

Many will forecast a return to double digit inflation, a or even hyperinflation, but in reality, QE will lead to modest rises in inflation, and by the end of 2013, despite more QE, UK inflation will be lower than at the end of 2012. (CPI Inflation was 2.7 per cent in November 2012).

On the back of QE, gold will probably do well, and oil will oscillate. But there are signs that China may be getting over its so-called soft landing, and growth may be higher in 2013. This may be enough to push up oil.

Finally, in the world of tech, LinkedIn will see profits double again as they did last year, Facebook will see its shares pick up and return to the IPO price, as the company begins to find ways to monetise its huge user base. Apple may take a knock in the smart phone business as the likes of Samsung and HTC see sales rise.  But it will announce its iTV player, and this will prove to be as big a deal as when the company revealed the iPhone. Shares will surge and Apple will be the world’s first company to be valued in excess of one trillion US dollars.

Sales at Amazon will rise, as new owners of its Kindle Fire start buying more from Amazon and less from traditional retailers. Amazon will appear to be on course to become the world’s largest retailer. And finally, IBM will see its best year in terms of share price growth, for many years.

©2012 Investment and Business News.

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One offs. In Monty Python’s ‘Life of Brian’, Reg said: “Apart from better sanitation and medicine and education and irrigation and public health and roads and a freshwater system and baths and public order… what have the Romans done for us?” The answer, of course, was “peace.”

Apart from rising food prices, petrol, gas bills, water, what makes you think inflation isn’t falling? To which the answer might come: “but even core inflation – with food and energy taken out – was 2.6 per cent last month.”

Okay, it’s not quite as catchy as Monty Python, but you get the point. How long must we suffer one-offs before they stop being called one-offs?

In fairness, there is not much of a relationship between monetary policy in the UK and the global hike in food prices. There may be a vague relationship with the price of oil and gas, because QE pushes up asset prices, and some speculators may buy oil as an alternative to holding government bonds. But frankly the relationship may be pretty flimsy.

But QE has influenced UK inflation in another way. It has pushed down on sterling. If it wasn’t for QE, it’s not unreasonable to assume the pound would be much higher in value today. The thing is that when a currency falls, there is kind of inflationary ricochet effect. The price of goods we import when our currency drops doesn’t all happen in one go. The price rises that occurred as a result of sterling falls in 2008 and 2009 are only just beginning to ebb.

Yesterday saw the release of the latest minutes from the Bank of England. Usually these minutes do little more than elicit the odd snore, but this time lurking in the minutes was pretty much the economic equivalent of dynamite.

It turns out that the Bank of England’s Monetary Policy Committee (MPC) is worried about the UK’s poor trade performance and while it accepts woes in the euro are have not helped, it also reckons that the pound is too high.

This is what the minutes stated: “Although the nominal effective exchange rate remained well below its pre-crisis level, some measures of sterling’s real exchange rate provided a less comforting view of the improvement in UK competitiveness.  In particular, a measure based on relative manufacturing unit labour costs was now only 10 per cent below its level in 2007, and just  5 per cent below its average in the decade prior to the depreciation.  It was therefore possible that the real exchange rate consistent with current account balance might be lower than its current value.”

Errr, to put it another way, manufacturing competitiveness is being hit by the price of sterling.

What does this mean? Well is that a hint that next year the Bank of England will put more emphasis on pushing down the pound?

The bank’s next governor  Mark Carney and the Fed – and indeed the Bank of Japan – are apparently coming around to the view that central banks should target nominal GDP – that’s GDP without allowing for inflation. So, it appears the powers that be are becoming more relaxed about the prospect of higher inflation in the short term in order to stimulate growth.

As for sterling, the runes seem to be pointing to falls in the pound in the year ahead.

Here is the snag. Japan’s new government wants a cheap yen. Brazil wants a cheaper real, and indeed its finance minister warned about currency wars two years or so ago now. China is not too keen on the idea of letting its currency rise, and some say Obama wants to destroy the value of the dollar. Oh yes, Greece, Spain, and at least half of the euro area desperately need a cheaper currency.

And by the way, on the subject of currency wars, Mervyn King recently warned of this danger too.

So there you have it, next year will be the year when all currencies will fall. It will also be the year when every team in the Premiership wins all its matches.

The alternative is currency stability. So what might currency stability do for us? Erm “peace”?

©2012 Investment and Business News.

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If you are a journalist, the French are great. They provide the juiciest copy, which can transform the driest topics into cannon fodder for xenophobes, and realists alike.

This time the task of ramping up Anglo/Gallic prejudices has fall to the Governor of the Bank of France Christian Noyer.  Talking to the ‘FT’, he suggested that the City of London should be stripped of its position as the financial hub of euro trading. So that’s bonds, derivatives, equities – in fact just about everything. If it’s finance and involves the euro, then London holds the position that should belong to Paris.

Mr Noyer said: “We’re not against some business being done in London, but the bulk of the business should be under our control. That’s the consequence of the choice by the UK to remain outside the euro area.”

The funny thing is, however, that Mr Noyer might be right – or at least partially right.

He is wrong about stripping London of its pre-eminent position. It is not up to governments to decide which centres should be hubs. You can’t wake up one morning, and say let’s rid London of its status as a financial capital.

But the markets can decide to do this. And there are signs that this is happening, and this is the price the UK pays for not being in the euro. It has nothing to do with the wishes of politicians, just the reality of markets.

But it doesn’t seem very likely that Paris will take over from London, however, not as long as France insists on anti-market friendly policies. A recent survey from the Conference Board in the US recently forecast that France will be the worst performing economy in the world over the next ten years or so.  The report may or may not prove to be right, but even if there is only a miniscule of truth in the report, it is hard to see Paris taking over from London in anything. See: Is France really set to be the worst performing economy in the world over the next ten years?

Moving away from France and the UK, there is the issue of tax avoidance. We hear about the evils of Amazon, Google, Starbucks and co avoiding tax, but the truth is that they are multinationals, and an advantage of being a multinational is that you can channel profits into countries where tax rates are lower. There is only one possible solution and that is to have some kind of minimum worldwide corporation tax rate (either that or have no corporation tax, at all).  Getting international agreement for such as idea is probably impossible, but a reasonable half-way measure might be an EU-wide corporation tax. Alas, the UK’s influence in the EU is such that it is unlikely to get such an idea through, even if it wanted to. This is another disadvantage of the UK’s EU cynicism.

On the other hand, a new series on ‘Sky News’ is set to expose the way the UK’s economy’s woes are focused on certain regions. As Ed Conway, the presenter of the TV series, said in the ‘Telegraph’: “It transpires that London and the South East of England never experienced a double-dip recession at all, they simply did not shrink through 2011 and 2012. The economic contraction that led to the national ‘double dip’ happened exclusively in the North, the Midlands, Northern Ireland, Scotland and Wales.” See: Prosperity across the South is hiding a recession in much of Britain

Here is the irony. While some may lament the disadvantages of not being in the euro, the UK suffers from its own single currency.

Truth is that the success enjoyed by the City has pushed up the value of the pound so much that regions outside the South East struggle to compete.

So should London and the South East have their own currency, let’s call it the Boris? Maybe an independent Catalonia needs its own currency too.

You may think this is a daft idea. You may be right.

It is probably the case that if indebted European countries left the Eurozone, their economies would, after an initial shock, enjoy a strong economic recovery.

But if you accept that the idea of London having its own currency is daft, this would suggest you believe the euro must survive, at any cost.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here