Economics Weekly - Can UK exports boost the recovery in 2010? Weekly economic data preview - Poor weather to cast cloud over upcoming data
Economics Weekly - 1 March 2010
Can UK exports boost the recovery in 2010?
Figures for December showed a widening
in the UKâ€™s trade deficit in goods with the rest
of the world to Â£7.3bn from Â£6.8bn in November. This represented the worst
monthly outcome since January 2009 and called into question the expectation
that UK growth in 2010 will be boosted by â€˜net
tradeâ€™, as exports exceed imports. In December, UK imports of goods rose by 5.2% while
exports rose by 4.5%. Figures in the second release of UK gdp for Q4 2009 highlight how difficult
the path to a strong economic recovery will be in 2010. Although Q4 growth was
revised up from 0.1% in the first release to 0.3% in the second, all of the
growth came from stocks and government spending. A slower pace of de-stocking added
0.5 of a percentage point to Q4 growth, while government spending contributed a
further 0.3 of a point. UK net trade (total exports minus total imports)
deteriorated, however, depressing Q4 growth by 0.2 of a percentage point,
despite signs of a pick-up in global demand and the competitive boost afforded
by the sharp fall in the pound.
In other words, had it not been for the
stocks and government spending components, which are unsustainable sources of
growth over the medium term, UK Q4 GDP would have posted its seventh consecutive
negative reading. In 2009 as a whole, net trade did contribute positively to
gdp growth, but in Q4 this contribution became negative, see chart a. What is
surprising is that the worsening trend of net trade in 2009 occurred even
though the pound was weak on a trade-weighted basis against the UKâ€™s top trading partners, and the economy
contracted by 5% in the year as a whole. The latter - weaker growth in domestic
demand - usually contributes to a lessening of import demand. In addition, a
weaker currency is also expected to contribute to a rise in exports and a fall
in imports. This combination is supposed to lead to a narrowing in the external
deficit and hence to a positive contribution of net trade to real gdp growth.
For last year as a whole, the story of a
positive contribution from net trade does seem to hold true. While exports
dropped 10.9% in 2009, imports dropped by 12.1%, leading to a net contribution
to real gdp growth of 0.7 of a percentage point (exports took 3 percentage
points from gdp but imports took 3.7 percentage points off gdp so a relative
gain of 0.7 of a point occurred). But as the chart shows, as the year
progressed, the positive contribution of net trade to gdp lessened dramatically
- so much so that by Q4 it had turned negative for gdp. Although we are hopeful
that net exports will provide a meaningful contribution to growth over the
coming quarters, so far there is little sign that either (i) more expensive
imports are encouraging a shift towards domestic demand; or that (ii) UK exporters are using the competitive
advantage from the fall in the exchange rate to gain market share. Worryingly, our
analysis (see Weekly - 8th February), suggests that UK exporters have responded to the decline
in sterling by raising prices. While this should have some positive spillovers
in terms of supporting domestic demand, it is not as effective for the economy
as a rise in the volume of exports by allowing export prices to fall in line
with the weaker currency.
But factors other than a desire by firms
to just widen profit margins may also be at work. First, chart c shows that the
improvement in the trade balance coincided with a sharp fall in the effective exchange
rate index, but this fall has partly reversed and now so has the improvement in
the trade deficit. This would imply that a greater degree of sterling weakness
at a lower permanent level is required to lead to a sustained improvement in
net trade. Second, the UK deficit in goods is so poor that only
two sectors, chemicals and fishing, are in surplus, see table 1. Although the
trade deficit in goods for 2009 as a whole improved to Â£81.9bn after hitting a
record of Â£93.4bn in 2008, it remains large at 5.9% of gdp. As chart c shows,
only a large surplus in services, 3.5% of gdp, brings the UKâ€™s total external deficit down to a
manageable 2.4% of gdp.
The third factor is that the current mix
of UK export markets may not be the best
combination required to lead to an improvement in net trade. Chart d depicts
the UKâ€™s ten top export markets, as a share of
its exports of goods in 2009. Top of the list is the US; bottom of the list is Sweden. Looking at economic growth in 2010,
based on consensus forecasts for these countries (see chart e), shows that the
strongest growing market, China, accounted for just 2.3% of UK exports in 2009. Admittedly, the next
fastest growing of this list, the US, accounted for 15% of UK exports. However, the other economies,
(aside from Sweden that absorbed 1.7% of UK exports) are expected to expand fairly
modestly or contract in 2010. This means that 2010 may not see as much of a contribution
from net trade as expected, making it harder for the economic recovery to build
momentum. In short, the headwinds facing the UK economy in 2010 remain substantial,
even after a poor 2009.
ô€‚„ The UK Monetary Policy Committee (MPC) reconvenes this week amid
continued bewilderment as to why the Committee failed to raise the QE target
last month, despite the benign medium-term inflation forecast outlined in the
Bank of Englandâ€™s latest Inflation Report. Last weekâ€™s upward revision to Q4
GDP, from 0.1%q/q to 0.3%q/q, may provide some ex-post justification for the
decision although, on closer inspection, the improvement was driven predominantly
by stocks and government spending, neither of which is expected to be
sustained. Nevertheless, the upward revision, coupled with the temporary surge
in CPI inflation, suggests little prospect of any change in policy this week.
We expect Bank rate to be left unchanged at 0.5%, with the suspension of the
APF almost certain to be kept in place. On the UK data front, the February PMIs are
likely to take centre stage. After the sharp improvement in January, we expect
the manufacturing PMI to drop back a little (from 56.7 to 56.5). Meanwhile, the
services PMI is forecast to have picked up (from 54.5 to 55.2) after the
weather-distorted drop in January. The PMIs point to continued growth in GDP in
Q1 2010, although in recent quarters the correlation between these surveys and
the official GDP data has not been particularly strong. The PPI and net
consumer credit reports are also due. Producer prices are expected to show both
output and input prices rose by 0.2% on the month in February, while the rise
in VAT and the cold weather point to a renewed fall in net consumer credit last
month. Also this week, we should see confirmation of the weather-impacted
downturn in the housing market, with mortgage approvals forecast to have
dropped sharply last month.
ô€‚„ As is so often the case, the data highlight in the US this week is provided by the labour
market report on Friday. The severe weather in February has added another
degree of complexity to forecasting monthly payrolls, with its impact generally
expected to lead to a further modest fall. The consensus estimate is -40K,
while we look for something closer to -50k, supported by the weak initial
claims data, see chart 1. After an unexpectedly sharp fall in the unemployment
rate in January, we look for it to edge
up slightly to 9.8% from 9.7%, while earnings growth is likely to remain
subdued. The details of the report will underline that the recovery remains
fragile and why the Fed is in no hurry to raise interest rates. The other main
US data releases this week, including January personal spending (Monday),
February ISM surveys of manufacturing (Monday) and services (Wednesday) and
January factory orders (Thursday) will provide clues about growth prospects in
Q1, after figures last week showed the economy expanded by 5.9% in the previous
ô€‚„ In the euro-zone, latest developments regarding Greece have centred on the ratings agencies, where
both Standard & Poorâ€™s and Moodyâ€™s have hinted at a possible reduction in Greeceâ€™s long-term credit rating. Complicating
the picture further were reports that a number of German banks would not be
investing new money in Greek government bonds, raising possible questions about
the effectiveness of any future EU bailout for Greece. The spread of 10-year Greek government
bond yields over equivalent German bunds has widened out to around 350bp. This
weekâ€™s main feature will be the ECBâ€™s monetary policy decision, where we expect
the main refinancing rate to stay on hold at 1%. Since Februaryâ€™s Governing
Council meeting, euro-zone Q4 GDP data have disappointed so we expect little
change in Jean- Claude Trichetâ€™s language that the euro area recovery path is
likely to be â€˜unevenâ€™ going forward. This weekâ€™s meeting also sees the latest
set of ECB staff economic projections, while markets will also be watching for the
precise terms of the ECBâ€™s last 6-month Long-Term Refinancing Operation. Other
data releases this week include the second estimate of euro-zone Q4 GDP, where
we look for an unrevised outturn of +0.1% quarter-on-quarter, Februaryâ€™s final
PMI survey data and preliminary euro-zone CPI data for February, where we
envisage an unchanged annual rate of 1.0%.
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