UK growth slows

UK growth slows due to 2016 Brexit uncertainty | In short

UK financial markets kicked off 2016 with the worst start to a year since 2008. Uncertainty around the UKs fate in the EU, and market turmoils look set to continue through the second quarter, as the economy and markets continue to seek stability.


Q1 2016

UK GDP qoq %, Q1 2016

Actual 0.4%
Previous 0.6%
Consensus 0.4%
Delta 0.4%

Trade and the EU dampened growth momentum at the start of the year, whilst domestic demand provided the majority of growth in the quarter.

A slow down of quarterly growth from 0.6% in Q4 to 0.4% in Q1 was in line with expectations.

Private consumption accelerated to 0.7% qoq from 0.6% in Q4. Government consumption expanded by 0.4% qoq following growth on 0.3% in Q4. Gross fixed capital formation grew by 0.5% after an oil -related contraction of 1.1% in Q4 2015.

However, business investment continued to decline. In its latest Inflation Report, the Bank of England noted that while the financing conditions on the supply side had

continued to improve in Q1, there had been a slowdown in demand for loans for large companies. This probably relates to the broader hesitancy by businesses ahead of the EU referendum that has been noted in other surveys. Despite a sharp

fall in trade weighted sterling in the first quarter, the trade deficit widened to

£18.0b in Q1 from £16.4b in Q4. Changes in exchange rates often take time to affect demand for imports and exports. It is therefore too early to expect a material boost in demand for UK goods from the weaker sterling. Indeed, if companies do not expect the weakness in sterling to be sustained if the UK votes to stay in

the EU, which seems likely, the temporary weakness in sterling might not show up in the trade balance at all. UK exporters may decide instead to bank the higher margins rather than cut prices as a form of precautionary saving in case of a Brexit.


Q2 2016

At press date, a general poll of polls, pointed to a 35% risk of the UK leaving the EU on June 23.

Our forecasts show a further slowdown in Q2 is likely ahead of EU referendum; after which we see growth accelerating in H2. Short of a Brexit, the pace of UK growth should recover in the second half of the year.

However, political uncertainty, orders and investment, and measures of confidence, all point to Brexit risk weighing on the appetites of households and businesses alike ahead of the vote.

We forecast a modest slowdown to a quarterly rate of 0.3% in Q2, driven by softer consumption and investment. Followed recovery in growth to 0.6% in Q3 if the UK votes to stay in the EU. Domestic fundamentals remain healthy.

Over the medium-term the risks to the downside for growth are limited: as private consumption (2/3rds of UK GDP), remains robust:

  • Household balance sheets are in good shape compared to pre-crisis.
  • Household debt as a %GDP has fallen to 90% from its peak of 107% in 2009.
  • Household debt to disposable income has fallen from 165% of GDP in 2008 to 136% of GDP in 2015 – back to 2003 levels.
  • The households’ ability to manage the debt has improved significantly.

Combine the above with: record employment, cheap oil, modest but accelerating wage gains, and a relatively business friendly Bank of England we expect this recovery to continue and with it, annual GDP growth to accelerate to 2.1% in 2017 from 1.9% this year.

Round Up 2015

Looking back to look forward | In short


Round-Up 2015

The dramatic declines in oil prices and commodities over 2015, created enough noise in many markets to obfuscate the modest growth achieved globally.

Whilst China decelerated and many emerging market economies contracted; developed economics recorded growth a mixed levels, but nothing was simple.

The Eurozone returned to moderate growth and the UK expanded slightly faster. Whilst the US grew comfortably its growth rate disappointed; and Japan experienced lackluster growth – again.

In financial markets:

  • Global sovereign bond yields receded further
  • The US dollar strengthened persistently, particularly vs emerging market commodity exporters

Stock market performances varied:

  • The UK FTSE posted a moderate decline (however the make up of the FTSE is somewhat over-weighted by global commodity companies relative to the actual economy)
  • The US S&P500, closed the year flat.
  • Whilst there was a moderate gain in Europe (STOXX up 4% in local currency, down 7% in US dollar terms)
  • And healthy performance in Japan’s NIKKEI


For 2016, we project global growth will pick up slightly.

Again the growth should be led by developed economies.

Overall we expect growth in Eurozone and UK to remain close to its growth trend – although disturbed mid-term by the uncertainty of Brexit. 

Expectations are for the US will likely expand solidly, and strengthen over 2016.

The outlook in Japan is modestly positive while Canada will remain weak. 

China’s growth will continue to decelerate gradually, while many emerging Economies will struggle with lower oil and commodity prices. 

On the other hand India and Mexico are posed to outperform.



As Eurozone domestic demand stays firm, supported by healthy gains in Germany, Spain and Ireland, alongside some improvement in Italy, its leaders must deal with the challenges caused by the influx of refugees and the rise of populist protest parties.

These anti-European movements pose a more serious risk to the cohesion of the EU and the euro than the euro crisis of 2011-12 ever did. We expect these risks to remain contained as Europe tries to defuse the migrant crisis and unemployment continues to fall.

Whilst no major EU country has scheduled a national election for 2016, we see a 35% risk that the UK may vote to leave the EU. Brexit could be very disruptive for the UK and cause tremors across the EU. At the least, it will generate a slow down in trade with the UK in H1 2016 whilst the outcome is mooted.


United States

We project US growth to exceed the forecasts of the Federal Reserve (Fed). Tight labour markets will finally push up wages and increases in core inflation will quickly follow. 

As a result, we expect to see several rate rises by the Fed in 2016, more than is currently priced into markets, still leaving monetary policy accommodative.

We expect the Bank of Japan (BoJ) to maintain their quantitative easing and zero interest rate policies. Additionally we expected The People’s Bank of China (PBoC) to ease further, as well as the Reserve Bank of India.


Webcast 035 | UK Economic prospects for the next five years

Ahead of the Queen’s speech, Delta’s CEO Rebecca Harding talks to Frances Coppola and Shaun Richards about the UK’s economic priorities for the next parliament.


Webcast 035 Author  |  Rebecca Harding  |  CEO

The UK’s economic challenges

Why it’s still “the economy stupid” | In short:


The UK government faces three significant challenges to the economy, alongside wider uncertainties regarding productivity and long term growth. These are:

  1. The prospect for export-led growth given the strengthening Sterling
  2. The UK’s trading relationship with Europe, in light of a promised referendum on EU membership, and
  3. The issue of Scotland following the SNP’s landslide victory.

The UK General Election 2015 is over. The economy won the day: despite the disappointing UK growth figures half way through the campaign, the perceived threat of handing over the economic reigns to Labour, with or without the Scottish Nationalist Party in a coalition, was a strong force underpinning the Conservative’s victory. There may well be a post-election feel-good factor; the immediate aftermath of the election saw Sterling and the FTSE 100 rise and while the FTSE has fallen back, this is because of broader issues in Bond markets. Sterling has continued to rise against the US Dollar. Quite apart from the well-documented tightening of the UK purse post-election, the dangers of ever-rising house prices and the equally well-documented productivity shortfall, the UK government faces three distinct problems as it starts its next five years in office.

The first problem is the prospect for export-led growth which dominated the “real growth” debate in the previous administration. As the value of Sterling strengthens, this objective becomes more difficult. On one level, a strong pound helps the British consumer: imports and holidays are cheaper and it fuels demand-led economic growth. However, although the correlation is not strong, at just 50% against the Euro and 27% against the US dollar, a stronger value of Sterling will have a negative impact on UK exporters in highly price-sensitive markets (Figure 1).




Figure 1  |  Value of UK exports vs EUR-GBP spot price, last price monthly, June 2001 – December 2015 (forecast)
Source  |  DeltaMetrics 2015, Bloomberg


The second problem is the UK’s trading relationship with Europe, given the promised referendum on European membership scheduled for 2017. Trade with Europe accounts for 43% of the UK’s goods trade; while this grew relatively strongly before and after the financial crisis, it has fallen back considerably since 2012 (Figure 2). Some of this is due to weak demand in Europe and a reorientation towards growth markets in Asia, particularly China. However, after 2019 we forecast some slowdown in the UK’s trade with Europe which, although potentially picking up in the next decade, is unlikely to regain the momentum of the pre-crisis era.




Figure 2 |  Change in UK trade with Europe, %, (2002-2030 – forecast)
Source  |  DeltaMetrics 2015


Third, there is the issue of Scotland following the SNP’s landslide victory. The route towards the break-up of the United Kingdom may have become inevitable given the overwhelming scale of the swing towards the nationalist agenda in Scotland. This will have economic as well as political consequences. For example, and at first sight, the exit of Scotland from the United Kingdom would harm the rest of the UK far more than it would Scotland. Taking oil exports from the UK’s trade balance would add to a burgeoning energy trade deficit by around £1.6bn by the end of 2016. The trade deficit (net X) is already a drag on the UK’s GDP growth and adding to it would cramp what is still a fragile recovery.

However the largest consequence could be the breakdown of what is an effective currency and customs union. According to UK government calculations, some 80% of Scotland’s GDP is dependent on free trade with the rest of the UK. This includes oil, of course, but equally significant are financial services and whisky – two of Scotland’s other leading export sectors. In other words, a large proportion of Scotland’s economic performance relies on the performance of England, Wales and Northern Ireland as well. The UK is arguably the world’s oldest and most successful currency union and Free Trade Area. The Bank of England is, already, the lender of last resort ready to support Scottish banks and the Scottish deficit with UK taxpayers’ money, while Scotland currently has substantial fiscal and political autonomy. Negotiating the infamous Barnett Formula may be a breeze compared to the likely challenges of restructuring Scottish debt from outside of a full UK customs union.

Moreover, if there were a second referendum with a vote to leave the UK, then on Friday 19th September, policy makers in Scotland and the rest of the UK would have to work out the terms under which Scotland could join a currency union as an independent nation. Effectively, the Union suddenly faces the same challenges as the Eurozone: how to integrate a deficit nation into a structure where a transfer union (i.e. cross-border tax transfers) would be necessary to correct the internal imbalances between members of the union. UK taxpayers would legitimately frown upon a transfer union if Scotland had its own tax-raising powers. But it would ensure that the lender of last resort (i.e. the Bank of England) does not have to loosen fiscal policy through greater Quantitative Easing (QE) in order to underwrite the Scottish deficit which currently stands at £12bn and which will grow if, under Scottish independence, the new administration undertakes to deliver on its expansionary promises.

All of this uncertainty will have consequences for markets. The weakness of the correlation between trade and the value of Sterling highlights this: Sterling is used as a speculative currency rather than a trade currency, but there are consequences for exporters nevertheless. Further, there are already multiple uncertainties brewing around the possibility of a Brexit from Europe; the challenges of productivity and long term growth remain as persistent now as they have ever been; the strong value of Sterling does not currently seem to be impeding trade due to the weak correlation between trade and the value of Sterling, so export-led growth is more likely to be driven by longer term competitiveness and productivity growth; the risk of a breakup of the UK before last September’s referendum has now become a reality for the next Parliament, whose responsibility will be to transition towards full fiscal autonomy for Scotland without risking the currency union that has held for so long. In conclusion, the economic honeymoon may well be very short if these considerations gather momentum.

Webcast 034 | Does Trade Finance drive Trade Growth?

Why has trade slowed so much since 2011? In our latest Webcast, we question the critical role of trade finance, arguing that its short-term outlook is not so good.


Webcast 034 Author  |  Rebecca Harding  |  CEO

Does Trade Finance Drive Trade?

Explaining the slowdown in global trade growth


In short:

  • Trade Finance has not maintained the growth required to ensure that trade deals between businesses are adequately financed.
  • Much of this is due to uncertainties in commodity prices and a greater perception of risk, especially in emerging and frontier markets, that is increasing compliance requirements within trade financing organisations.
  • Trade Finance and global equities were highly correlated until the onset of QE in Japan.

If Quantitative Easing (QE) in Japan and Europe was meant to do anything, it was meant to weaken the yen and the euro in order to stimulate export-led recovery. It is too early to tell if this has happened in Europe, but it certainly has not happened in Japan and the signs in Europe are not encouraging. Alongside QE, weaker emerging market currencies against the US dollar should also be promoting trade, yet the CPB Netherlands Bureau reported in April that global trade in January and February 2015 had contracted. The World Trade Organisation reduced its trade growth forecast for 2015 to 3.1% and the Delta Economics forecast remains lower at just 1.4%.

The trade verdict on QE has to be a resolute “thumbs down”. Not only has the effect in Europe and Japan been minimal, the UK still struggles to understand why, despite a weak currency post-crisis for all except the last 12 months, there has been no export-led growth.

It is possible, of course, that analysts and economists have been looking at the wrong thing. After all, why would bond purchases on unprecedented scales do anything except stabilise bank balance sheets, de-risk sovereign debt to some extent, and prompt cross-border capital flows into equities and tangible assets such as property? What we should be looking at are the more fundamental reasons for slower trade growth: the risks around its financing.




Figure 1 | Trade finance and trade growth compared (2002 – 2020, forecast)
Source | DeltaMetrics 2015


First, trade finance accounts for some 80% of world trade including all insurances and guarantees. Around half of this is in the form of either letters of credit or on open account and covers commodity and infrastructure, supply chains and project finance. Figure 1 shows the way in which total trade finance has trended since 2002 and forecasts up to 2020.

Three things are remarkable from the chart:

  • Trade finance actually started to decline between 2006 and 2007 as the seeds of the financial crisis were beginning to germinate. This was accompanied by a flattening out of global trade growth followed by the well-documented drop in world trade in 2009.
  • Trade finance grew exponentially in 2010 as trade recovered but growth in emerging markets, especially Asia, was nearly twice the level of that in Europe (nearly 60% compared to just under 30%) and nearly 20% higher than in the US.
  • Trade finance has slowed dramatically since 2010 and although we are expecting some growth towards 2020, this will not be on the same scale that would be able to promote the same sort of rapid trade growth that characterised the immediate post-crisis growth in trade.

Second, the slowdown in trade finance is affecting core commodity and supply chain markets (Figure 2). Alternative energy, represented by vegetable oils, is a sector where growth in trade finance is evident over the next two years. However, the picture for this year is bleak for other commodity sectors, such as iron and steel and oil and gas, continuing into 2016 for iron & steel. Arguably, this represents lower oil and iron ore prices, which are inhibiting investment in 2015. But the effects will be to slow rates of infrastructure growth. Similarly, contraction in trade finance to core supply chains, such as pharmaceuticals and automotives, suggests a weaker outlook for global demand for these products.




Figure 2 | Changes in trade finance for core commodity and supply chain markets, 2015 & 2016
Source | DeltaMetrics 2015


Third, the explanation for why core trade finance markets are slowing is, to a large extent, due to risks and uncertainties around finance into emerging and frontier markets, considered at the recent ICC Annual Banking Summit in Singapore. These discussions come in the wake of ethical and compliance issues around trade finance in some of the world’s largest financial institutions. This is being met with greater calls for compliance and regulation but, of course, this will take a few years to embed. In the meantime, it will restrict the availability of letters of credit and push more trade finance into open account, where a company itself takes the trade finance risk. In essence, the costs of due diligence for projects in emerging economies are too high relative to the returns, while commodity prices remain weak.

Against this backdrop, it is hardly surprising that the flow of investment capital into equities rather than into trade finance has been particularly marked since the middle of 2013 when the stories first broke (Figure 3). The correlation between trade finance and the S&P 500 up to that point was 71% but has since broken down as equities have continued to rise and trade finance has declined.




Figure 3 | Monthly value of world total trade finance (including insurances), USDbn versus S&P 500, Last Price Monthly, June 2001 – December 2015 (forecast)
Source | DeltaMetrics 2015, Bloomberg


Trade can be seen as risky: some of the countries that are richest in commodities and trade growth potential have under-developed financial structures and are unstable geo-politically and politically; emerging market growth is fragile while China readjusts its economy; lower oil and commodity prices favour developed nations but while demand remains weak, returns cannot be assured. At Delta Economics, our modelling suggests that any pick-up in trade finance is not likely for at least another three years, with a resultant impact on trade growth globally.

Webcast 033 | Losing interest: why negative interest rates present a challenge to global growth

It has been a tough start to 2015: what will be the outcome of persistently low interest rates be? Rebecca Harding and Sarasin & Partners’ Subitha Subramaniam discuss the topic.


Webcast 033 Author  |  Rebecca Harding  |  CEO

2020 chocolate shortage

A number of recent reports have predicted a global chocolate shortage by 2020. Unfortunately, Delta Economics forecasts that these concerns could be merited. The trade data shows that demand for chocolate will continue at a high rate to 2020, but cocoa exporters (predominately within Africa) will struggle to meet this demand with a corresponding increase in exports.

Over the next five years demand for chocolate is expected to experience steady growth. In Asia, we expect demand to grow at an annualised rate of 7% to 2020. Interestingly, however, it is not from Asia, that the highest rates of demand for chocolate can be found. Demand for chocolate from the MENA region is expected to increase at an annualized rate of over 8% over the same period. North American demand for imported chocolate is also expected to increase by 6% annually to 2020.

Over the next five years, the largest cocoa exporting nations, the Ivory Coast, Ghana, Nigeria and Cameroon, are all expected to see growth in cocoa exports. However, these rates of growth are significantly lower than the expected increase in global demand for chocolate. This increases the pressure on cocoa farmers and the implications for African agricultural industries are severe. In Ghana, for example, the cocoa industry employs around 800,000 families and has given rise to the saying “cocoa is Ghana, Ghana is cocoa”.

Without investment to maintain sustainable conditions for productivity, there will be little impetus for growth and cocoa farmers will be unable to meet growing demand. However, with adequate policy measures in place, there could be a prosperous future for farmers, producers and consumers alike.


2020 chocolate shortage  |  Author  |  Nayani Bandara  |  Analyst and Project Manager

Webcast 032 | Resurgent dollar is not good for business

The US Dollar has strengthened in March: Rebecca Harding discusses the consequences of a potential rise in US interest rates on emerging markets and the rise of the yuan as a major trade currency.


Webcast 032 Author  |  Rebecca Harding  |  CEO

Gold Standard

Three links that show the Yuan is ready to float  |  The value of the yuan against the US dollar is not making the headlines it should at the moment. Between the 17th and 20th March it appreciated by nearly 1%. Much of this volatility was arguably a response to the Federal Open Market Committee’s (FOMC’s) removal of the word “patient” from its statement on US interest rates. However, between the same dates, gold prices increased by nearly 3% prompting China to announce that the value of its currency against the US dollar was “appropriate”.

The occurrence of these three things within a week does not look like a coincidence, especially given that the Asian Infrastructure Investment Bank, first conceptualised in October 2013, acquired the support of the UK government, some European governments, the IMF and the Asia Development Bank during March 2015.

As China’s economy rebalances and becomes demand-led rather than export and infrastructure driven, it is in China’s interests to support trade in its neighbouring countries. This allows the region as a whole to develop by picking up some of the intermediate manufactured goods production that China can re-distribute through its own supply networks as it moves further up the manufacturing value chain.

Markets are markets and it is a mistake to conclude much from a few weeks of data. Yet it has shown how the re-focusing of China’s currency policy could have global market consequences. Currency policy is currently hidden within a multitude of different signals which appear to have converged during early March. China’s policy makers may be showing that they want to expose the yuan to international markets as they prepare for capital account convertibility. But they have also shown that they are preparing the yuan to establish itself in trade finance and indeed international markets as the second global currency.

There are three reasons for stating that the yuan is strengthening as a global currency: the first is trade, the second is the link between trade and the value of the yuan and the third is the link between gold and the value of the currency.

First, the link between trade and gold in China’s case is clear. Figure 1 shows how gold prices and China’s trade have moved together since June 2001 with a correlation of above 90%. The movements were almost identical up to the end of Q3 2013 when China’s trade starting slowing, de-coupled for 12 months to the start of Q4 2014 and have been similar for the last four months. February’s drop in gold prices mirrors China’s drop in trade and while this is clearly not causality, the closeness of the correlation is important.




Figure 1  |  Monthly Value of Chinese Total Trade (USDbn) versus XAU-USD Gold Spot Price, June 2001 – March 2015
Source  |  DeltaMetrics 2015, Bloomberg


Second, the correlation between Chinese trade and the value of the currency is similarly high at nearly 95%. However, interestingly, against the USDCNY spot (where strengthening of the yuan is shown by a downward trend) the correlation with Chinese trade is negative. In other words, despite a perception that the yuan’s value is artificial because of its 2% peg against the US dollar, the mild appreciation of the yuan since 2005 has not had a detrimental effect on trade (Figure 2). What this suggests is that the peg is helping to shore up the currency’s strength as trade develops rather than being managed to shore up trade.




Figure 2  |  Monthly Value of China’s Total Trade versus USD-CNY Spot, Last Price Monthly, June 2001 – December 2015
Source  |  DeltaMetrics 2015, Bloomberg


Further evidence of this is shown in the third link: between the value of the yuan and China’s trade in gold. The correlation is nearly 80%: that is to say that as the exchange rate has moved, so gold trade has increased (Figure 3).




Figure 3  |  China’s Gold Trade (USDm) versus USD-CNY Spot Price, Last Price Monthly, June 2001 – December 2015
Source  |  DeltaMetrics 2015, Bloomberg


Three things are immediately striking about Figure 3: first, gold trade only really started when the currency first appreciated against the US dollar; second, gold trade spiked when the initial 1% peg against the dollar was introduced in 2012; third, imports of gold started to increase sharply again from Q2 2013 as pressures for reform grew and the country prepared for its 18th CPC Central Committee Meeting in November 2013.


What all this suggests is that China’s currency policy is apparently a great deal more coordinated than it might appear at first. It is impossible to know exactly how much gold the country has and the values of trade in physical gold also underestimate total trade in gold which may come from barter or alternative forms (such as jewellery). However, alongside the increase in recorded trade in gold, China has been reducing its foreign currency reserves. This suggests that there is the potential for a large currency shift away from the dollar towards the yuan. The fact that gold reserves are increasing while foreign exchange reserves are falling suggests that policy makers are less concerned about weak Chinese growth and exports as they are about ensuring that, when the time is right, the yuan can enter a free-float against the dollar with impunity.

The links between trade, the yuan and gold all point in one direction: expect the gold price to increase, the yuan to strengthen and China’s exports to increase. China’s economy does not look like it is slowing – but it could just be setting a new Gold Standard.