Shoring-up growth

The trade messages for the UK Chancellor’s budget | The UK Chancellor of the Exchequer, George Osborne, will stand up to make his budget speech against a backdrop of fragile growth and geo-political and economic risk. He can celebrate the fact that the UK has the fastest growth rate in the G7, that there is some evidence of businesses starting to invest and that the Purchasing Manager Index surveys for the UK have suggested that output is remaining in positive territory. But he should also be wary: the crisis in the Ukraine has unsettled markets and Russian investors in London alike; despite efforts to promote long term competitiveness and growth through exports, UK export growth has remained stubbornly low and apparently resilient to the near 25% devaluation of Sterling against the Euro and against the Dollar. And the UK’s output overall still remains below its pre-crisis levels according to the Bank of England.

Promoting trade is one of the UK government’s policy tools for securing long-term growth. UK Trade and Investment supports exporters and there is an export guarantee scheme that runs in partnership with the commercial banks to allow exporters access to trade finance when entering new markets. There is some evidence that the Trade Ratio (exports divided by imports) is improving slightly (Figure 1) but this is as much due to falling imports as it is to do with any marked improvement in exports.

 

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Figure 1 | UK Exports, Imports and Trade Ratio (X/M), June 2001-January 2014

Source | DeltaMetrics 2014

 

Two things are noticeable from this chart, which is shows trade in nominal value US dollar terms up to the end of January 2014. First, export and import trade growth has been very flat since the end of 2011 which marked the end of the post-crisis trade recovery. Second, the UK trade ratio has declined from 0.84 in June 2001 to 0.71 in January 2014, which explains the deterioration in the UK’s trade deficit over that time. The most marked declines in the ratio were pre-crisis with a trough reached in April 2007. The crisis appeared to hit exports less than imports up to the end of Q1 2011 but the ratio fell sharply between February 2011 and March 2012 caused largely by a slower decline over that period in imports relative to exports.

This does not appear to have much to with the value of Sterling, however, as Figures 2a and 2b demonstrate. Over the whole period, the value of Sterling weakened slightly against the US Dollar and the Euro but arguably insufficiently to explain the size of the change in the trade ratio.

 

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Figure 2a | UK Trade Ratio (X/M) vs GBP per USD June 2001-January 2014

Source | DeltaMetrics 2014, Bloomberg

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Figure 2b | UK Trade Ratio (X/M) vs Euro per GBP June 2001-January 2014

Source | DeltaMetrics 2014, Bloomberg

Mark Carney, who was widely expected to preside over further currency devaluation has actually seen the currency increase, but the impact appears to have been the opposite of what might have been expected: the trade ratio has improved: exports have become slightly stronger despite a strengthening currency.

As noted in a previous Trade View, the UK does seem to be A Case Apart in terms of the relationship between its trade and its currency. Some of this is because of the role UK corporates play in global supply chains and this is evidenced by our trade with China and Brazil in particular, illustrated in Figure 3.

 

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Figure 3 | UK Exports to BRICs, June 2001-January 2014 USDm

Source | DeltaMetrics 2014

 

UK automotive exports to China, Brazil and India have been increasing since June 2012. This was the date when BMW invested in its UK production facilities and this has been further supported by subsequent investment from Jaguar Land Rover as well. Alongside this, UK exports to Germany of cars have declined suggesting that the BMW investment, in particular, was deliberate policy to export the Mini from the UK to China. The UK’s automotive trade with China was less than its automotive trade with Germany up until 2013 but has now taken over as the largest partner for this sector.

There is a danger in over-promoting both exports to China and the car sector as models of how the UK is driving export-led growth, however. Figure 4 shows that UK car exports are forecast to fall over the next year and while this is part of a wider global forecast downturn, it is likely to have an impact on our trade ratio as one of three major export sectors which may struggle during 2014.

 

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Figure 4 | Exports and Forecast Export Growth for Key Products

Source | DeltaMetrics 2014

 

Gone are the days when UK Chancellors stand up to give their budget speeches with a glass of whisky in their hands, yet the Chancellor may want to celebrate the growth in exports of the UK liqueur and spirits sector. But as he ponders what to do to support UK PLC, it is clear that he needs to support UK exporters generally and productivity and competitiveness in particular as trade across the world fails to deliver growth in the way that it has done in the past.

 

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Figure 5 | UK Imports and Exports vs FTSE 100 Last Price Monthly, June 2001-January 2014

Source | DeltaMetrics 2014, Bloomberg

He may also like to ponder this: the government was elected on the basis of a promise to maintain the UK’s triple A rating by bringing down its budget deficit. While short-term financial stringency is important, the only long-term route to bring down a budget deficit is to ensure long-term growth through competitiveness and exports are a key part of this.

The service sector is growing and yet merchandise trade remains highly correlated with the FTSE 100 index, as shown in Figure 5. With exceptions at the beginning of the time series and in September 2011, trade and the FTSE have largely moved together. Financial markets are entering into Q2 2014 in a febrile state, wary of geo-politics, deflation in Europe and of Dollar denominated debt in Asia, all of which will dampen the UK trade growth forecast for this year. Against this backdrop, the UK Chancellor has no option but to support long term growth through competitiveness and trade. Measures to extend Export Finance Guarantees and promote innovation, especially in engineering and pharmaceuticals can only help to shore up aerospace, automotive and pharmaceutical exports and the role of UK exporters in global supply chains. It may even further help strengthen the UK’s equity markets.