Economics Weekly - Recovery in UK exports holds key to future growth; Weekly economic data preview - BoE MPC to provide further detail behind decision to halt QE
Economics Weekly - 8 February 2010
Recovery in UK exports holds key to future growth
The sharp fall in sterling over the past
three years and the nascent signs of recovery in the global economy provide an
opportunity for growth that the UK cannot afford to miss. With the
household and corporate sectors weighed down by high levels of indebtedness,
and the public sector about to embark on a substantial fiscal squeeze, the
prospect of a meaningful recovery in domestic demand over the coming years is,
we believe limited. Instead, to achieve a reasonably strong and sustained rate
of growth means it is not only desirable, but essential, that the UK rebalances away from debt driven domestic
demand towards net exports. The competitive boost provided by the fall in
sterling, and the steady recovery in global demand, provide this opportunity.
Since peaking in January 2007, sterlingâ€™s
trade weighted index has fallen by around twenty-five percent. While the
trade-weighted exchange rate has recovered a little over the past year, the
overall decline over the past three years represents the largest correction in
the exchange rate since the UK withdrew from the ERM in the early
1990s. As chart a shows, the decline in sterling has been most acute against
the yen, with GBP/YEN having dropped by around almost 70% over this period.
Nonetheless, against the US dollar, euro, Swiss franc, and a host of emerging
market currencies, sterling has also fallen sharply.
To the extent that a fall in the exchange
rate raises import prices and lowers export prices, one might expect the fall
in sterling to be associated with a marked improvement in the UKâ€™s trade position (the difference between
the amount we export and import, in current prices). But, as chart b shows, the
improvement in the UKâ€™s trade balance in recent years has been
Since early 2007, the UKâ€™s total trade deficit in goods and
services as a proportion of gdp has improved by just over 1 percentage point
(pp) to 2.2%, driven by a reduction in the visible (goods) trade deficit. While
the current trade deficit is not out of line with the experience of the last
decade, it remains troubling that the UK export sector has not yet responded more
strongly to the fall in the exchange rate, particularly given the fragile backdrop
to domestic demand. This is particularly so, as a large part of the improvement
in the UKâ€™s trade deficit has been the result of a
sharp fall in imports, reflecting weak demand conditions at home. This source of
improvement cannot be sustained indefinitely, and a meaningful recovery in the
UKâ€™s export performance will be required if the trade balance is ultimately to move
back into surplus territory - as it did briefly in the mid-1990s, following
sterlingâ€™s exit from the ERM.
So why has the UKâ€™s trade position not improved more sharply?
Part of the reason may be that the competitive boost has occurred against the
currencies of those countries which undertake relatively little trade with the UK (see chart c). For example, UK exports to Japan, Switzerland and Brazil account for only 4% of total exports.
However, against the currencies of our
largest trading partners - the major euro zone countries and the US - the drop in the exchange rate has
still been substantial. Against the euro and US dollar, sterling has dropped by
around 25-30% since earlty 2007 - far more than it has against many of the
developing economy currencies. It seems that rather than increasing market share,
therefore, UK exporters have used the opportunity of the
weaker exchange rate to rebuild profit margins. Indeed, over the past three
years, export prices have risen by almost 25% (se chart d).
The UKâ€™s terms of trade is the ratio of its
export prices to its import prices. As such, it measures how many units of
imports the UK can buy with one unit of exports. Other
things being equal, a fall in the exchange rate might be expected to lead to a
deterioration (i.e. fall) in the UKâ€™s terms of trade, as import prices rise and
export prices fall (and vice versa). As chart d shows, however, the UKâ€™s terms of trade has actually improved
slightly over the past three years. In other words UK export prices have risen relative to import
prices, despite the fall in sterlingâ€™s exchange rate over this period. The improvement
in the terms of trade, it seems, has limited the recovery in UK export volumes.
The experience of the past three years
contrasts with the experience of the UK in the early 1990s, when export volumes
responded more aggressively to the fall in the exchange rate. Indeed, it was
the boost to UK net trade during this period that was
instrumental in raising real incomes and bringing the UK out of recession. It remains to be seen
whether the same will occur this time around. It may not if export prices do
not fall. However, the lags between exchange rate movements impacting on trade
volumes can be substantial. Companies, for example, may be locked in to
multiyear fixed price contracts; they may be wary about lowering their export
prices for fear that the decline in the exchange rate could be short-lived;
and/or they may need to widen margins to help protect their balance sheets.
Notwithstanding the above, we are hopeful
that the UK will respond to the opportunities that
arise from the fall in sterling and the signs of global economic recovery. Indeed,
the marked improvement in the export orders balances of the latest CBI SME
Trends and manufacturing PMI surveys provide grounds for
optimism. According to the January PMI
survey, manufacturing export orders are currently at their highest level since
this data were collected in 1996. Although the share of manufacturing in gdp
has fallen markedly over the past thirty years, there remain many industries,
in both the goods and services sectors, in which the UK has a comparative
advantage - chemicals, business & financial services, engineering and
biosciences, to name but a few. If the UK is emerge from the downturn with a
stronger and more stable economy over the medium to longer term, it is
essential that this rebalancing away from domestic consumption towards net
Adam Chester Senior UK Macroeconomist
Editorial comments to:
Lloyds TSB Corporate
10 Gresham Street
London, EC2V 7AE
Tel: +44 (0)20 7158 1748
Weekly economic data
preview - 8
BoE MPC to provide
further detail behind decision to halt QE
ô€‚„ Following on from last weekâ€™s decision
by the MPC to halt its programme of quantitative easing, attention will shift
to the detail of its quarterly Inflation Report (published on Wednesday), which
would have been a key input into the MPCâ€™s deliberations. Key themes arising
from the statement accompanying the policy decision announcement was that the Committee
thought recent monetary policy initiatives would continue to â€śimpart a
substantial monetary stimulusâ€ť to the economy, although it acknowledged that
should the recovery falter, it could restart the programme of asset purchases. We
expect the detail of the Inflation Report to strike the same tone and show that
the MPC is very much in â€śwait and seeâ€ť mode. On dataflow, the BRC retail report
is released on Tuesday. The January CBI retail report was downbeat, with the VAT
rise and inclement weather negatively impacting activity. Our forecast for a two
percentage point fall in the annual rate of BRC total sales growth (to 4%) is
also a reflection of these factors. We expect the headline trade balance (also Tuesday)
to be unchanged at ÂŁ6.7bn, while industrial production data (Wednesday) are
expected to post a 0.3% decline in December. That would be consistent with the
sectoral output data within the ONSâ€™s preliminary GDP estimate released last
month, which showed that the industrial sector grew 0.1% over Q4.
ô€‚„ Financial markets will be closed in the US on Monday for the Presidentsâ€™ Day holiday.
Although there are no major economic releases on Tuesday, the sale of $40bn of
3yr notes by the Treasury will be closely watched. Given the recent weakness of
global equities, we expect to see strong appetite from investors. The main data
highlight this week is provided by the January retail sales figures on
Thursday, which will provide an early pointer for consumer spending and growth
prospects in the first quarter. We look for a modest gain of 0.3% in headline retail
sales and excluding autos of 0.5%, rebounding after surprise falls in December.
It is worth highlighting though that the monthly data are notoriously volatile.
The University of Michigan consumer sentiment index, published on
Friday, is expected to show a further modest gain in February, reflective of
the improving labour market. We expect the headline index to breach the 75
for the first time since January 2008.
However, after the news of a further fall in non-farm payrolls last month,
focus will also be on the latest initial jobless claims data on Thursday,
particularly following the surprise gain seen last week. We look for a sharp
fall to 445K in the week to February 6, from 480k previously. The other major
release in the US this week is the December trade balance
on Wednesday. We look for a modest narrowing in the trade deficit to $36bn,
from $36.4bn, on stronger exports. The data will also be used to refine
estimates of US Q4 2009 GDP growth.
ô€‚„ At the recent ECBâ€™s press conference,
Jean-Claude Trichet was noticeably more upbeat on the subject of Greece and the efforts being made to repair its
public finances. So there was more than a touch of irony when stock and bond
markets registered significant falls shortly afterwards, apparently on the back
of concerns over contagion effects from the eurozone periphery. As far as the
spread of 10-year government bond yields over equivalent bunds is concerned, Portugal and Spain have also moved into the limelight.
Preliminary Q4 GDP releases feature strongly in this weekâ€™s euro-zone economics
data calendar. At the aggregate euro area level, we look for an outturn of
+0.4% quarter-on-quarter, yielding an annual rate of -1.9%. National data from Germany, France and Italy are published on the same day, Friday.
Broadly speaking, exports and inventories remain the key drivers of euro-zone
economic activity, although these components clearly do not guarantee seamless
recovery. Other economic releases include December industrial production
figures for the euro-zone (along with national data for Germany, France and Italy).
George Johns (UK Macroeconomist), Jeavon Lolay, (Senior
Global Macroeconomist, Mark Miller (Global Macroeconomist)
Any documentation, reports, correspondence or other material or information in whatever form be it
electronic, textual or otherwise is based on sources believed to be reliable,
however neither the Bank nor its directors, officers or employees warrant
accuracy, completeness or otherwise, or accept responsibility for any error,
omission or other inaccuracy, or for any consequences arising from any reliance
upon such information. The facts and data contained are not, and should under no
circumstances be treated as an offer or solicitation to offer, to buy or sell
any product, nor are they intended to be a substitute for commercial judgement
or professional or legal advice, and you should not act in reliance upon any of
the facts and data contained, without first obtaining professional advice
relevant to your circumstances. Expressions of opinion may be subject to change
without notice. Although warrants and/or derivative instruments can be utilised
for the management of investment risk, some of these products are unsuitable
for many investors. The facts and data contained are therefore not intended for
the use of private customers (as defined by the FSA Handbook) of Lloyds TSB
Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial
Services Authority and is a signatory to the Banking Codes, and represents only
the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension
and investment business.
Forex Trading News
Daily Forex Market News Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Forex News Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."
Actionable trading levels delivered to YOUR charts in real-time.
Tue 31 July 2018 AA JP- Bank of Japan A 06:00 DE- Retail Sales A 09:00 EZ- flash HICP/GDP AA 12:30 US- Core PCE Deflator A 14:00 US- CB Consumer Confidence Wed 1 Aug 2018 A Final Mfg PMIs AA 12:15 US- ADP Private Payrolls A 15:00 US- EIA Crude AA 18:00 US- Federal Reserve Decision Thu 2 Aug 2018 AA 11:00 GB- Bank of England Decision A 13:30 US- Weekly Jobless Fri 3 Aug 2018 A Final Services PMIs AA 12:30 US- Employment A 12:30 US/CA- Trade
John M. Bland, MBA co-founding Partner, Global-View.com
Global-View Affiliate Program
We are starting an affiliate program to market some of our products.
Send me an email if you would be interested or if you know someone who would like to be an affiliate. Generous commissions payout for those accepted.
Put the word "affiliate" in the email subject line.
Veteran FX Trader, Max McKegg, forecasts all the Major currencies and the Australasians; providing Daily and Medium Term Trading forecasts to subscribers, who include large Banks the world over, as well as individual traders in more than 30 different countries.
looking for your first broker or do you need of a new one? There are
more critical things to consider than you might have thought.
We were trading long before there were online brokers. Global-View
has been directly involved with the industry since its infancy. We've
seen everything and are up-to-data with recent regulatory changes.
The Global-View Forex Forum is the hub for currency trading on the web. Founded in 1996, it was the original forex forum and is still the place where forex traders around the globe come 24/7 looking for currency trading ideas, breaking forex news, fx trading rumors, fx flows and more. This is where you can find a full suite of forex trading tools, including a complete fx database, forex chart points, live currency rates, and live fx charts. In addition, there is a forex brokers directory where you can compare forex brokers. There is also a forex brokers hotline where you can ask for help choosing a forex broker that meets your individual fx trading needs. Interact on the same venue to discuss forex trading.
The forex forum is where traders come to discuss the forex market. It is one of the few places where forex traders of all levels of experience, from novice to professionals, interact on the same venue to discuss forex trading. There is also the GVI Forex, which is a private subscription service where professional and experienced currency traders meet in a private forex forum. it is like a virtual forex trading room. This is open to forex traders of all levels of experience to view but only experienced currency tradingprofessionals can post.
Currency trading charts are updated daily using the forex trading ranges posted in the Global-View forex database. You will also find technical indicators on the fx trading charts, e.g. moving averages for currencies such as the EURUSD. This is another forex trading tool provided by Global-View.com.
The forex database can be used to access high, low, close daily forex ranges for key currency pairs, such as the EURUSD, USDJPY, USDCHF, GBPUSD, USDCAD, AUD, NZD and major crosses, including EURJPY, EURGBP, EURCHF, GBPJPY, GBPCHF and CHFJPY. Data for these currency trading pairs dating back to January 1, 1999 can be downloaded to an Excel spreadsheet.
Forex chart points are in a currency trading table that includes; latest fx tradinghigh-low-close range, Bollinger Bands, Fibonacci retracement levels, daily forex pivot points support and resistance levels, average daily forex range, MACD for the different currency trading pairs. You can look on the forex forum for updates when one of the fx trading tools is updated.
Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.
Global-View.com also offers a forex blog, where articles of interest for currency trading are posted throughout the day. The forex blog articles come from outside sources, including forex brokers research as well as from the professionals at Global-View.com. This forex blog includes the Daily Forex View, Market Chatter and technical forex blog updates. In additional to its real time forex forum, there are also Member Forums available for more in depth forex trading discussions.
WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES
CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN
EXCHANGE AND DERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE
PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE
INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC
REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL
SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR
SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS.