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Economics Weekly - Can the UK emulate Germany’s export surge? Weekly economic data preview - US housing market and eurozone survey data stand out amid August holiday torpor...

Economics Weekly 23 August 2010

 

Can the UK emulate Germany’s export surge?

 

Exports are powering economic growth in Germany, but can the same thing happen in the UK? After all, the UK is banking on a rebalancing of the economy away from consumer spending towards exports to drive the recovery. We look at a number of comparable macroeconomic statistics to assess whether the UK is in a position to emulate Germany.

 

Figures for the second quarter of 2010 showed a rise of 2.2% in German GDP, the best performance amongst the EU economies by far and one of the fastest quarterly increases in the series since the 1950s. Even assuming that growth slows markedly in the second half of 2010, the figures suggest that the German economy will expand by around 3% this year. To say this is quicker than was expected a year ago is an understatement. For instance, the median forecast for German growth in 2010 as recently as January this year was 1.8%. By contrast, the projections for UK economic growth in 2010 have barely budged from around 1¼% since the start of the year.

 

Startlingly, however, nearly all of the improvement in Germany’s growth has come from the performance of the external sector. Of course, to some extent that has to be conditioned by the strong recovery in the world economy, led by the large developing economies of China, India, Brazil and Russia. Still, the opportunity presented by this recovery has been grasped by Germany. The question is, can the UK do the same thing?

 

Using China as a proxy for the emerging market economies show, in Chart a, that German exports to China are rising by nearly 30% year on year and has been doing so intermittently for some time. Yes, the recession meant that there was a large drop off in exports when trade finance was temporarily cut off but that quickly reversed when it resumed. Now, the total current value of German exports is close to where it was prior to the recession. It is not that UK export growth to China is not rising - it is - but that this growth is lagging well behind that of Germany’s.

 

Chart b suggests that the explanation for this does not lie in the exchange rate - the pound has fallen further against the Chinese yuan in the last few years than the euro. What is more, relative unit labour costs, a true measure of international competitiveness that takes into account exchange rate shifts and changes in wages, show that the UK has become more competitive than Germany in the last year, see chart c. Of course, this may simply mean that more time is required for UK exporters to take advantage of this situation. Yet, the chart also shows that the UK was more competitive than Germany between 2000 and 2005 without any discernible boost to export performance.

 

What else therefore might help to account for the strong performance of German exports and can it be copied by the UK? In Germany, manufacturing accounts for around one quarter of the economy; in the UK, this figure is about one-seventh. Reflecting this, employees in employment in manufacturing in Germany is about 5m; in the UK, the comparable figure is 2.5m. Cars, machinery, chemicals and electronics dominate German output. For the UK, chemical output is third in gross value added in the manufacturing sector, electronics fourth, cars sixth and machinery all the way down in seventh position. Clearly, the UK is a long way from being able to replicate Germany’s industrial structure. Chart d shows just how the exports of capital goods, like machinery, are a big driver of Germany’s export success.

 

This means that the basic structure of industry in the UK makes it very difficult for it to emulate Germany in its exports of manufactured goods to the fast growing emerging markets, especially to China.

 

The latter’s demand for goods to feed its industrialisation and its consumption of high value added cars and pharmaceutical products are key to Germany’s recent success. That said, the UK has responded, with wage inflation falling back, see chart e, albeit still remaining above that of Germany. This adjustment in pay growth has undoubtedly made the UK economy more competitive in global markets. However, in the short term it still leaves the UK a long way from being able to emulate Germany’s export success. For this to happen, it seems that a long, hard slog of economic adjustment lies ahead.

 

The UK’s strength lies more in financial services, unfortunately this is where markets for its exports in emerging economies are currently not as open and as well developed as they are for manufacturing goods. To help change this, the UK should press for more open markets in services, particularly financial services, where it does seem to have a comparative advantage.

 

Trevor Williams

Chief Economist, Corporate Markets

 

Weekly economic data preview  23 August 2010

 

US housing market and eurozone survey data stand out amid August holiday torpor...

 

􀂄 In the UK, after a predominantly subdued tone from the Bank of England’s Inflation Report and MPC minutes, this week sees something of a pause for breath in terms of economic data releases. The main highlight will be the second estimate of Q2 GDP, where we look for an outturn of +1.1% quarter-on-quarter, unrevised from the preliminary estimate published in late July. Subsequently-released June industrial production figures – which showed a 1.0% quarter-on-quarter increase during Q2 – imply no revision to the preliminary GDP estimate (taken alone, at least). Other UK releases this week include the CBI’s Distributive Trades Survey, where we look for a net balance of 30% of retailers reporting higher sales volumes compared with a year ago. As a quarterly survey, the report will also contain a balance on prices which be watched closely in the context of the UK inflation debate. Finally, Nationwide house price data for August are also released.

 

􀂄 This week sees a variety of key economic data in the eurozone. In particular, the latest wave of PMI business survey data are published while later in the week Germany’s Ifo report is released. In contrast to the general tone of US data, eurozone PMI surveys have performed very well recently on the back of robust Asian demand for exports and relief following the recent EU bank ‘stress tests’. We look for a modest correction in August’s preliminary manufacturing survey to a reading of 56.5, from 56.7 previously. Within services, meanwhile, our forecast stands at 55.5 compared with July’s outturn of 55.8. Other key indicators this week include Germany’s Ifo survey, where we see a pull-back in the expectations component reflecting concerns about the evolution of global economic recovery. We expect the overall business climate index to soften to 105.3 from July’s 106.2. Finally, euro M3 money supply data will incorporate the latest figure on bank lending to the private sector. Significantly, the pace of contraction in loans extended to non-financial corporations has now started to ease.

 

􀂄 This week in the US there are a number of important updates regarding the housing sector, GDP and durable goods orders. Following a record widening in the US trade deficit in June, we expect the second estimate of Q2 GDP on Friday to be revised down to 1.4% quarterly annualised growth from an originally reported 2.4%. Furthermore, Q3 GDP indicators to date are suggesting that growth could remain muted for some time. Although US durable goods orders are expected to have rebounded in July, we think by 0.5% month-on-month, recent surveys suggest underlying demand is softening. Furthermore, the sluggish recovery in the labour market is hindering any uplift in confidence and spending. While we expect initial jobless claims to fall by 25k after last week’s shock rise to 500k – the worst since November 2009 – the number of lay-offs by firms has clearly trended up in recent months and will weigh on household spending over the coming quarters. The weak labour market is also likely to coincide with continued weakness in existing and new home sales. Following a firmer-than-expected rise in June, we look for existing home sales to have fallen by 13.2% in July, to a level of 4.67 million.

 

􀂄 Meanwhile, in emerging markets, the South African economy is expected to have expanded by 3.1% year-on-year in Q2, up from 1.6% during the previous quarter. Nonetheless, the recovery remains fragile, in particular domestic private demand continues to lag the export sector. Consequently, we expect interest rates to be maintained at 6.5% into 2011.

...

Economic Research team

 

Economic Research,

Lloyds TSB Corporate

Markets,

10 Gresham Street,

London EC2V 7AE,

Switchboard:

0207 626 - 1500

www.lloydstsb.com/corporatemarkets

 

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