Import Export Balance and the Economy
Global Economics Weekly Brief
Spring lambs may be as much in demand for their fleece as their meat this year as whopping rises in gas prices will have households reaching for their woolly jumpers this winter. The large expected increases in utility and fuel costs (10% to 25%) led the Bank of England to revise its inflation forecast up. The Governor also warned of hard times ahead because of strong downward pressures on economic growth. In contrast, growth accelerated in the most of the Eurozone – even in Greece – although Portugal slid into recession. Inflation is still the global bogeyman. The Bank of England and the European Commission increased their inflation forecasts for 2011, and the US is now seeing prices accelerate too. Do these institutes have a `ground` understanding of the global `reality` of business and domestic life?
The Bank of England revised its forecasts for UK inflation and growth. Mervyn King, the Governor of the Bank of England, certainly gave us no reason to think things would become any more comfortable in the next year or so. The Bank of England’s projection for GDP growth was edged down a little, from 2% to 1.75% in 2011. (this need to be looked again very soon!) At the same time the Bank increased its inflation forecast to 3% by mid 2012, compared with the 2% estimate in February. But the Governor warned it could increase to 5% in the meantime boosted by the increase in VAT, utility and import prices, and some rebuilding of companies' margins. The increase in inflation will be more than likely more than 5%, more like 7% at the present global position!
Interest rate changes will depend on banks’ funding rates. The Governor gave nothing away on the timing of interest rate changes. But he did make it clear that changes in interest rates will also be determined by the difference between the Bank Rate and the funding rates faced by commercial banks. The gap is wide now, but if it shrinks it will be a signal that policy rates will rise, even if it’s just to keep the monetary policy stance the same. Bank rates will rise and when they do it will be rapid!
UK industrial production growth slowed in March adding to worries of a slowdown in the recovery. The index of industrial production rose only by 0.3%m/m, well below economists’ expectations of 0.8%m/m. Weak growth in oil and gas extraction was largely responsible. But the flagging manufacturing sector was of more concern. It grew by only 0.2%m/m in March, after stalling in February. A sharp contrast since manufacturing was the star of the UK recovery last year.
UK exporters took a step back in March. The UK trade deficit in goods and services rose to £3.0bn in March, up from £2.7bn in February. The £0.7bn deterioration in goods trading pushed the deficit higher, despite a £0.4bn increase in the services surplus. UK goods exports fell by 0.5%m/m in March, but without oil this would have been a 4.1%m/m fall. The weakening trade balance is disappointing after recent improvements, especially given the importance of this net trade in supporting the UK recovery.
Figures shows fall in UK construction growth
The Purchasing Managers' Index (PMI) has shown that growth in the UK construction industry has dropped sharply in April.
The index for construction fell to 56.4 in March to 53.3 in April, data that was much weaker than predicted, resulting in the pound hitting a thirteen month low against the euro.
The data from the index will only further add to expectations that the Bank of England will once again keep interest rates at 0.5%, and continue to keep the rates at this level for some time.
Despite the data from the PMI the Office for National Statistics (ONS) said the UK economy returned to growth in the first quarter, although construction remained a particularly weak spot, with the sector shrinking by 4.7%.
David Noble, chief executive at the Chartered Institute of Purchasing and Supply (CIPS), claimed the construction sector was in better shape than the ONS figures suggested.
"Whilst growth in the construction sector has lost its pace compared to the start of the year, the PMI figures indicate that the situation is nowhere near as sluggish as latest ONS figures suggest," he said.
But he added: "Low activity levels in the housing market, tighter government purse strings, rising input prices in fuel and materials, as well as poor cash flow in some cases, are clearly a worry.
"Confidence amongst UK constructors remains at a historically low level as the number of jobs continues to drop."
The UK Economy – Not All Doom And Gloom
Amidst the doom and gloom of the last few months, April saw a few positive surprises from a range of UK economic data including retail sales, public borrowing, trade figures and unemployment that helped Sterling break the $1.65/ £1 barrier against the US Dollar for the first time in 16 months.
Retail sales figures jumped by 0.7%, against March figures of a 0.2% decline. This beat expectations, and added fuel to speculation over UK growth for the first quarter. Despite last month’s Budget lending forecast amendments, public borrowing came in lower than predicted for the end of the fiscal year, coming in nearly £2.5bn less than forecast for March.
Trade figures released on April 12th also sent an upbeat message to the UK by coming in better than expected. The trade deficit narrowed, indicating an increase in UK exports that shows the UK economy is rebalancing towards more manufacturing driven growth. Furthermore, unemployment figures showed that the number of people out of work went down to 2.48 million with the unemployment rate also dropping from 8.0% to 7.8%. This is definitely good news for the UK economy that was not necessarily reflected in the exchange rate over the month. This should set the UK up well for future months.
So why has sterling weaken against the euro? The key reason for sterling suffering against the euro over the last two months is the Bank of England’s caution over interest rate hikes. Inflation figures for March saw an unexpected drop, so for many investors, an interest rate hike in the UK is off the cards for the time being whereas in the euro zone, markets are pricing in another two rate increases before the end of the year. In the short term, sterling is likely to remain subdued on interest rate expectations against the euro.
Eurozone growth accelerates in Q1, but growth forecasts unchanged. The first estimate of Eurozone GDP shows growth of 0.8%q/q in Q1, up from 0.3%q/q in Q4. This translates to a healthy annual growth rate of 2.5%y/y. Germany and France pulled away with growth of 1.5%q/q and 1.0%q/q respectively. But in the periphery things were much less buoyant. Portugal fell into recession with a contraction of -0.7%q/q, while Italy managed only 0.1%q/q. On the upside, there was good news for Greece at last. Its economy grew 0.8%q/q in Q1, the first expansion since Q4 2009. The European Commission kept its GDP forecast at 1.6% for 2011, but upped its inflation forecast to 2.6%y/y from 2.2%y/y in February. Look very closely next month (May 2011) there will be rapid changes!
US retail sales rose by 0.5% m/m in April and inflation picked up. US retail sales have now increased for 10 months in a row lifting the annual growth rate to a rather strong 7.6%y/y. The big winners were car dealers, petrol and non-store retailers, which all saw double-digit growth in sales. It shouldn’t be a surprise then that inflation is picking up in the US too. It jumped from 2.7%y/y in March, to 3.2%y/y in April as rising energy and fuel prices took their toll. Core inflation, which excludes food and energy, rose by only 1.3%, but even this is a 14 month high. Consumer confidence increased to a three month high in May too. Perhaps this is a sign that demand will add to supply pressures on US prices.
US trade gap widened on higher oil prices. The US trade deficit increased to $48.2bn in March (6%m/m), led by a 31%m/m increase in the bill for crude oil. But on a more positive note, it looks like the recent depreciation in the dollar has helped exporters. Total exports increased by 4.6%m/m and are currently at record highs. Furthermore, the US trade deficit with China contracted by 4%m/m in March to $18.1bn, an encouraging sign with regards to global rebalancing.
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The hard figures on the Import and Export Balance!