Yesterday produced some news which initially looked really good for the UK economy so let me go straight to the revision of the UK economic growth figures.
UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.8% between Q2 2013 and Q3 2013, unrevised from the Preliminary Estimate
GDP in volume terms increased by 1.5% when comparing Q3 2013 with Q3 2012
The 0.8% increase in GDP in the latest quarter follows increases of 0.7% in Q2 2013 and 0.4% in Q1 2013.
So the news remains good and if we look back we see that it looks like it is singing along to the Beatles.
It’s getting better all the time
Whilst these are true it is also true that looking at it just like that is the equivalent of taking the Blue pill in the Matrix series of films. However if we asked Morpheus to be our guide he would point out that there are some troubling influences at play here.
The Balance of Payments
This is a long running issue for the UK economy as we moved into deficit on our current account back in 1985 and have run persistent deficits ever since. We had an apparent improvement in the mid-90s after Black Wednesday lead ironically considering its name to better times for the UK economy. However after that the position was summarised thus by the Office for National Statistics.
Overall, exports of goods and services grew by an average 1.2 per cent each quarter during this period, but imports by a higher rate of 1.6 per cent.
So it is not true to say that the UK has nothing to export as we do quite well at it but it is much more true to say that however well we do our demand for imports seems to exceed it. Some might say our lust for imports. If there is a British economic problem one of the main signals of it is there. Also over the last decade or two it was exacerbated by the entry of places such as China to the wider world economy which led to something described as this.
The ‘Great Doubling’, calculating that the global labour force increased from 1.46 billion to 2.93 billion. As a result the global capital-labour ratios halved,
As an aside we get a strong hint as to why real wages are under such pressure in so many areas but if we stick to today’s theme the advent of this led to cheaper and thus more imports being available to the UK. With our lust for imports there was only one likely result.
Briefly the credit crunch helped as the UK current account deficit fell but it then began to rise leading to us being in deficit by 3.6% of our economic output in 2012. Now let me bring this up to date.
The deficit in net trade was £8.9 billion in Q3 2013 with exports falling by 2.4% between Q2 2013 and Q3 2013 and imports growing by 0.4% over the same period. This follows a net trade deficit of £5.5 billion in Q2 2013
So a troubling picture where an existing problem is being exacerbated. The most worrying is the way that exports actually fell.
UK Domestic Demand
This was following a regular pattern for UK booms which then turn to bust as we can see below.
Household final consumption expenditure rose by 0.8% in Q3 2013, an eighth consecutive quarter on quarter increase (see Figure 5) following the longer-term trend. The level of household expenditure is now 2.4% higher than in Q3 2012.
So we find ourselves concerned about domestic demand rising and sucking in imports in a regular theme if you look at UK economic history. Actually perhaps there is a glimmer of hope here in that we did not suck in even more imports.
The economics textbooks have told us many things which have not turned out to be true. Let me offer you one from the reign of Mervyn King as Governor of the Bank of England. Our trade weighted exchange rate fell from 97.09 to 80.26 over the ten years of his term which ended in June. Yet we did not gain much in trade terms did we? Even if we allow for the decline of North Sea oil output the response was disappointing. I have come to the conclusion that just like for interest-rates the timing of an exchange rate move matters much more than economic theory assumes so Mervyn was either just unlucky or not very good.
Of course an alternative theory is that the UK pound sterling needs to fall by a lot more! Personally I am not convinced by that as the depreciation we had in 2007/08 gave us an inflation problem which eroded any competitive gains. Also our success in the pre credit crunch era came here.
The UK increased its share in global exports of smaller high technology manufactures such as medical and pharmaceuticals, communication equipment, office machinery and computers
If I was in charge I would be encouraging such areas and making sure that schools and universities were producing individuals equipped to help such areas.
The pound goes awry
You might think that such issues might have the pound under downwards pressure. Not a bit of it! In fact it had a really good day yesterday and this morning has pushed above US $1.63, Euro 1.20 and 167 Yen. This continued a trend which started when the current Governor of the Bank of England Mark Carney announced his policy of Forward Guidance as since then the pound has risen by around 5%. So we end up hoping that our exports as as unresponsive to price rises as they were to falls.
The current pound rally seems driven by the fact that the UK has relatively good economic growth figures right now.
Yesterday’s discussion about the economic impact of a possible Scottish departure from the UK left a troubling thought for England. Scottish oil and gas production would no longer count as a export or an import substitute implying that the balance of payments for England (and Wales and Northern Ireland) would be dreadful.
I can help with some data on trade in goods which the HM Revenue and Customs suggests was in deficit by some £25.9 billion in the second quarter of 2013. England exported some £56.9 billion and imported £85.8 billion. This does not include services which are a strength.
I wondered in yesterday’s analysis of Scottish independence if the trend spread if London might consider becoming a City State. Perhaps Allister Heath was thinking along similar lines as he has published this today in City-AM.
Most remarkably of all, if London were a City-state, it would be running the sixth largest current account surplus of any rich nation……… Looking at the current account as a whole, which is bolstered by huge flows of income, London’s surplus is around 8 per cent of GVA, and the rest of the UK’s deficit a massive 7 per cent.
Some care is needed with such numbers as Gross Value Added numbers are certainly disputable as for example as pointed out on twitter by @Hotairmail the numbers are inflated by head offices being in London. Actually that makes London a rather similar business model to Ireland does it not?
The HM Revenue trade figures are the ying to the above yang however. In the second quarter of 2103 it has a trade deficit of £5.8 billion with exports of £7.1 billion exceeded by quite a distance by imports of £12.9 billion.
There are always caveats with an analysis of the balance of payments as the numbers can be revised years and even decades later. For example nearly two decades later it became apparent that the 1967 pound £ devaluation was not anything like as necessary as it appeared at the time. Ooops! However over two decades of sizeable current account deficits does leave the UK vulnerable in my view. Ironically the current consumption based boom reinforces this with the danger that it sucks in imports at a time when the external environment especially in Europe is not helping exports. We have been down this road before and should perhaps be grateful that currency markets look at balance of payments deficits these days with the equivalent of Nelson’s blind eye.
My suggestion is that we look at something very fundamental and start with our education system to make sure that we are providing as many skilled individual’s as we can to our successive industries. This is a slow burner but the truth about quick fixes is that they rarely work!
Also let me give the announcement by the Bank of England this morning a well done! Here is the crucial bit.
The FLS (Funding for Lending Scheme) extension will continue to allow participants to draw from the scheme from February 2014 until January 2015, but household lending in 2014 will no longer generate any additional borrowing allowances. Instead additional allowances will now only reflect lending to businesses in 2014.
Let us hope that there is a genuine boost to business lending which is in line with my theme above. Also boosts to the housing market are a function of our past problems as domestic demand hits a trade constraint and ends the boom. It has taken it some five years of mistakes but finally the Bank of England looks as though it is giving something useful a try.
Let me end by wishing a Happy Thanksgiving to those of you celebrating it.