|British Prime Minister David Cameron hosted a meeting of business ambassadors in Downing Street with Trade and Investment Minister Lord Green, former chairman of HSBC Bank, to discuss how the government can boost Britain’s export market, Jan 10, 2011.|
The UK manufacturing sector has shown strength in
recent months but service sector performance remains fragile. The UK government
is banking on growing exports to support an sustainable recovery.
The British Chambers of Commerce’s latest
Quarterly Economic Survey (QES), released last week, suggests that the UK
economy has continued growing in the fourth quarter of 2010, but at a slower
pace than in the second and third quarters. The survey, combining over 5,600
responses from businesses across the UK, paints a mixed picture of the economy.
While the indicators point to a strong manufacturing sector, performance in the
service sector is weaker, raising concerns about a sustainable recovery.
EEF, the UK manufacturers' association, says that
last year the manufacturing sector outpaced expectations and the overall economy
by expanding 3.8%. This year, another strong result is forecast with 3.5% growth
for manufacturing compared to a solid if unspectacular 2.1% growth for the
economy as a whole. In 2012 growth is forecast at 3% and 2.6% respectively.
This balanced growth is broadly based across all
sectors with the top performers forecast to include mechanical engineering and
metal products, which benefit from having high exposure to export markets where
demand is likely to be strongest.
EEF chief economist Lee Hopley, said:
“At the start of 2010, shell-shocked from the worst recession in 80 years,
forecasters across the country were wary of predicting anything more than very
modest growth. But manufacturing picked up the baton and delivered its best
performance in sixteen years.
“Manufacturing now looks set to be at the
heart of the rebalanced growth the economy needs with sectors most exposed to
international markets likely to post the highest growth.”
On Tuesday, consumer prices in the UK were
reported to have risen by 3.7% in December, boosted by rising prices for food,
fuels and air transport. Consumer price inflation has been at 3% or more since
January 2010, compared to the official target of 2%.
The British Chambers of Commerce (BCC) said over
the next few months annual consumer price inflation will rise to 4% and probably
higher, following the hike in the VAT rate this month to 20%.
David Kern, chief economist at the BCC
said: "...our view remains the same - - raising rates
at a time when fiscal policy is being tightened, while businesses and
individuals are facing greater pressures, would be a mistake and should be
avoided. The factors contributing to inflation at present are also adding to the
squeeze on profits and disposable incomes. We believe that interest rates will
have to increase later in the year, but it is critical that the MPC (Bank of
England's Monetary Policy Committee) waits until the initial impact of the tough
austerity measures have been absorbed."
As in other developed countries, export growth is
seen as key to a sustainable recovery.
|Source: Davy Research |
Prime Minister David Cameron is spurring business
to grow exports to offset up to 300,000 job losses in the public sector,
following the implementation of the government’s £81bn program of of spending
Last week, the merchandise trade deficit was
reported to have been at £8.7bn in November, mainly due to higher oil imports.
The deficit was £25.7bn in the three months to
November - - little changed from the previous months but £4.5bn higher
than a year earlier.
Exports rose 10.3% in the three months to
November compared with the same period in 2009, while imports increased 13.5%.
Conall MacCoille, economist at Davy Research
in Dublin, says in a report this week that the sharp depreciation of sterling,
following the collapse of Northern Rock in 2007, had been expected to help
reduce the UK’s trade deficit.
He says that Figure 3 (above) illustrates
that in trade-weighted terms the depreciation in 2007 was even larger than in
the period following the UK’s exit from the European Exchange Rate Mechanism (ERM)
in 1992. Peak to trough, the nominal effective exchange rate fell by 27% between
2007 and 2009 compared with a decline of around 20% from 1990-1995. Following
the UK’s exit from ERM, the trade deficit began to shrink, eventually moving
into a small surplus in the mid-1990s. Conversely, the sharp appreciation of
sterling from 1996 onwards led to a deterioration in the UK trade deficit. This
time around, however, there has been little response with the trade deficit
remaining close to 4% of GDP in the third quarter of 2010. Given that there had
previously been a strong statistical relationship between the exchange rate and
trade performance across many countries, the relatively poor performance of UK
trade since 2007 is surprising.
MacCoille says over the past two decades, the
UK’s goods export market share has been in secular decline, mainly due to the
emergence of new competitors such as Eastern European economies, China and other
Since 2007, however, this decline has stalled - -
providing some evidence that the sterling depreciation has had a positive impact
on UK export growth. That said, in the period following the UK’s depreciation in
1992, the UK gained market share in the traded goods market. So the sterling
depreciation appears to have had less of a positive impact on the UK's goods
export market share this time around.
Traded services, comprising around 40% of total
exports, are particularly important for the UK. Since 1990 the UK has gained
market share in the global traded services market, but this trend went into
sharp reverse in 2007 - - severely hurting aggregate UK export prospects.
The rising importance of the traded services sector for the UK economy has been
accompanied by increasing specialisation in the financial and business services
sectors. Figure 5 illustrates that these sectors have doubled their share of UK
exports over the past two decades. Together, these sectors accounted for 7.3% of
UK GDP in 2008 and 62% of UK services exports in nominal terms.
|Source: Davy Research |
The report shows that UK import prices have
increased by around 23% since 2007. It says surprisingly, export prices (in
sterling) have risen by approximately the same amount so that the UK terms of
trade have been broadly flat. That is, UK exporters have increased the price of
their exports in sterling, so that their prices in foreign currency terms (e.g.
euro) have remained constant. UK export volumes are unlikely to rise sharply
because companies have taken the competitive gain from the sterling depreciation
in the form of higher profit margins rather than attempting to cut their
foreign-denominated prices and gain export market share.
Prospects for UK net trade in 2011
Most macroeconomic projections for UK GDP
growth in 2011 are conditional on a sharp turnaround in trade performance
- The outlook for UK growth remains highly
uncertain. Most forecasts for 2011 GDP growth are based on a sharp
improvement in UK trade performance next year.
- On average, forecasters expect net trade to
make a 0.5% contribution to GDP growth in 2011 (having detracted from growth
- The poor performance of UK net trade has
been surprising given the competitive gain from the sharp sterling
depreciation in 2007. Thus far, forecasters have provided little rationale
for why this weakness should dissipate in 2011.
Net trade unlikely to pick up sufficiently
strongly to offset fiscal adjustment; policy rates may remain at historic low
for longer than expected
- The UK's specialisation in traded financial
and business services, a poorly performing sector, is likely to continue to
act as a drag on export growth next year.
- The Bank of England expects an improvement
in UK net trade in 2011 in its central projections. But the November
inflation report outlined the severe doubts of the Monetary Policy Committee
(MPC) in this regard.
- If the MPC's projections for GDP growth
based on a turnaround in net trade are not realised, short-term interest
rates may remain on hold at their current historic low of 0.5% for longer
than the market might currently expect.