jka on economics UK

UK Economics : Is the march of the makers, a case of lions led by donkeys?

"Lions led by donkeys" is a phrase used to describe the British Infantry of the First World War and to condemn the generals who commanded them. The contention is that brave soldiers (lions) were sent to their deaths by incompetent and indifferent leaders (donkeys).

"The English Generals are wanting in strategy. We should have no chance if they possessed as much science as their officers and men had of courage and bravery. They are lions led by donkeys." According to the German Command Headquarters.

Strategy in business and in war is key. Which battles at which time, with what resource. SWOT profiling, constant benchmarking is key to success. Understanding this makes it more difficult to understand the present coalition strategy in expecting so much of the manufacturing sector and denying the contribution of the business, financial and professional services sector, especially banking,  to the British Economy

The march of the makers, rebuilding the workshop of the world to finance the big society is  a battlefield folly. The march is faltering, the trade deficit continues to expand. The analysis of forty years of UK trade amply demonstrates the UK needs a strong service sector to finance the trade in goods deficit.

According to a recent paper by Yiping Huang and Bijun Wang, 2011 China’s manufacturing sector accounts for 41% of output compared to just 12% in the UK. With a world average of 13% China’s relative share is 3.2 compared to the UK’s 0.9. That’s tough competition.

China’s revealed comparative advantage for manufactures is 1.13 compared to the UK’s 0.79. A larger competitor, tough competition, with a significantly higher competitive advantage will provide a difficult challenge.

In financial services, the reverse is true, China’s revealed competitive advantage is 0.03, compared to the UK’s 3.01. The world average is just 0.5. The UK is the strongest player in the world of exports in financial services with the highest revealed comparative advantage. So why not promote and support the sector instead of suggesting an evil imbalance exists within the economy?

Why place so much hope in an ill equipped manufacturing sector in trend decline long before Gandhi promoted homespun? The renaissance just will not happen. Play to your strengths may sound facile in terms of strategy but it should be something even donkeys can grasp.

Notes
The revealed comparative advantage was first proposed by Balassa (1965).The comparative advantage of a country's industry could be revealed by the ratio of the share of an export sector's exports in total exports to that share  for the world. Balasa, Bela 1965 Trade Liberalisation and revealed comparative advantage" Manchester School of Economic and Social Studies Bulletin Vol 33 No 2 pp 99 - 117

Yiping Huang, Bijun Wang Chinese Outward Investment: Is there a China Model. China & World Economy Volume 19 No 4 Jul - Aug 2011

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

Why is the Euro so strong, given problems with the Olive branch?

Planning a trip to France or Spain this Summer? Ever wondered why the Euro is so strong against Sterling. With a spot rate around 1.12, one hundred pounds would buy around one hundred and five euros. Living on a fixed pension in Spain, the weakness represents a drop in income of thirty six per cent over ten years. Why is Sterling so weak against the Euro?

According to some the Euro is near collapse with reluctant Franco German support for the Olive branch of the Euro. The currency caution is “Beware of Greeks needing bailouts”, for they will soon be followed by the others in the PIG pen. Portugal, Italy, Greece, Spain are queuing at the trough, the system will collapse say some. From a macro economic and political risk perspective, a strong Euro doesn’t make sense. 

Monetary considerations offer some support given the interest rate disparity between the 50 basis points available in London compared to the 50 basis points deposit facility and a 1.25% available for main refinancing operations available in Euroland. Think of the 2% marginal lending facility from the middle of April and the capital pull makes some sense. 

But the fall in Sterling began long before the interest rate spreads opened up. The Sterling effective exchange rate has fallen by almost 25% since 2008. Examine the charts and the fall in Sterling is not universal. A cable rate (Dollar Sterling) of 1.62 isn’t that bad in 2011. It was actually 1.60 eleven years ago. 

A rate of 1.12 against the Euro is really mis priced. The problem is not Sterling against the Euro, it is the Euro rate against the Dollar. Compare the weakness of the Dollar. It has fallen from 1.18 to around 0.70. A decline of forty per cent. Against the yen, the fall has been almost sixty per cent.  

To understand, look back, in history to the dilemma of the Bank of France at the end of the 1920s. This was the “end of era” phase of Sterling as the world reserve and the last flap for Gold. France with significant sterling holdings had to divest but in a way which didn’t overly damage the exit price. 

Consider China with some $3 trillion of reserves. The Middle Kingdom has to diversify away from the imperilled dollar. The dollar is an end of era reserve currency. Hence the quest for a hybrid option in Special Drawing Rights, SDRs or a return of Keynesian Bancor from the Asean block.

It is estimated that already over 20% of China’s reserves are in the Euro. China has built the longest bridge in the world, not the Qingdao bridge, [pictured] but the financial bridge from Beijing to Berlin. China needs a strong Euro to delay the day when the renmimbi will rule. Hence the offer from Chinese premier Wen Jiabao to buy Euro bonds and landmarks in Greece. Parthenon not the Pound.

The strength of the Euro is a challenge to holiday makers, but it is the weakness of the dollar which is the challenge to policy makers. It is the strength of the Asian economies and China specifically that pose the real policy dilemma for the UK. A sterling recovery may take longer than we think. 

An extract from China - Return of the Middle Kingdom - The impact of China on the world economy. John Ashcroft 2011.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

Puzzles at the Bank of England as the economy doesn't fit the models

Writing in today’s Daily Telegraph Roger Bootle makes the point that economics is too important to be left in the care of academics. The emphasis on mathematics and econometrics at the expense of economic history and pragmatic interpretation of events is evident. 

“Pick up the leading journals today and even many economists cannot understand the titles, never mind the articles. Open the pages, littered with algebra, and you could be forgiven for thinking that you were looking at a musical score. The mathematicians have taken over.”

“Students of economics today are force-fed theoretical models of startling banality and irrelevance, leavened only by doses of econometric techniques of dubious validity and near-zero intellectual interest. Typically, they complete their course knowing nothing about the British economy and untrained in how to think.” 

I do like Roger Bootle. I once went on a course to understand GARCH modelling. This is a modelling technique involving Gaussian or general autoregressive conditional heteroskedasticity. I didn’t understand a word as the lecturer began to chalk obscure hieroglyphics onto a blackboard from 9:00 am in the morning. There were only six of us in the room and was feeling more than a little overwhelmed. As time moved on 11:30 in fact, the lecturer realised he had made a mistake in the chain process at around ten minutes passed ten and a full hour and ten minutes were wiped off the board. We broke for coffee and I didn’t go back. 

If you read the minutes of the Bank of England Monetary Policy committee for last month you begin to think that RB has a good point. The Bank of England is puzzled that theory isn’t working. A depreciation of sterling according should lead to an improvement in the Balance of Payments. Exports are cheaper and imports are more expensive. There should be a reduction in import volumes but the bank noted :

“It was puzzling that import growth had remained so robust, despite the substantial depreciation of sterling. It was possible that domestic substitutes for some imported goods and services were not available. It was also possible that UK firms in some industries lacked the plant or capacity to expand production rapidly in response to the past depreciation of sterling and it would take time for them to install it."

Hello! It’s a wake up call for the Bank of England. The Bank has over two hundred economists educated to Masters or PhD standard. They produce much research and analytical papers. Two of my favourites from last year are :

“How non Gaussian shocks affect risk premia in non-linear DSGE models”. (No. 417) and “An efficient method of computing higher order bond price perturbation approximations.” (No 416). Very helpful to policy makers everywhere, I am sure.

Someone should commission a paper and send it to the MPC, on why depreciation has never worked, be it 1931, 1947, 1967 or 1992. Peter Spencer of the ITEM club points out the manufacturing has been in decline since the 90’s. I presume he meant the 1890’s. In 2011 there is little manufacturing capacity in the UK and this is likely to remain the case. There will be no rebalancing of the economy towards net trade surplus.

In 1983 the UK went into deficit in manufactured goods following the Howe Thatcher pogrom. The trend decline is getting worse not better. Only in one manufacturing sector, chemicals does the UK trade at a surplus the rest is in serial deficit. 

The Bank seems to think that in pubs around the UK discussions are taking place about the merits of open hearth steel making versus Bessemer and the electric arc furnace. Resurrection of tube making facilities using the pilger process is also on the agenda presumably but where to buy the equipment? Back to the darts with a pint and a packet of pork scratchings the only option. Import substitution - buy real ale. Devaluation isn’t working but then it never did.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

UK Trade deficit - this is no time to be bashing the banks!

In 1931, the deficit on balance of trade in goods and services amounted to -2% of GDP. The import bill for food, beverages and tobacco amounted to 8.6% of GDP. Add in the raw materials bill, and a manufacturing surplus of just £72 million could do little to offset the 12.3% GDP bill for essential imports in food and basic commodities. Invisible earnings, which would normally finance the import bills had been hit by a fall in revenues particularly shipping revenues as world trade collapsed.

The UK government faced a crisis which was to lead to Sterling leaving the Gold standard and a devaluation from the level of $4.86 to the dollar. Eat less and export more was the call to remedy the problem.

In 1948, A net trade deficit of just under 2% precipitated the devaluation of Sterling from $4.20 to $2.80. As always the mantra, eat less, export more was prevalent. A food bill of some £450 million amounted to just under 4% of GDP. Including raw materials, the total amounted to 7% of GDP. The UK was struggling to finance the deficit either in terms of manufacturing surplus or invisibles surplus.

By 1950, according to Coutts and Rawthorn, the UK was a great industrial power with more than a third of its labour force employed in the manufacturing sector. There was a trade surplus in manufactured goods equal to 10% of GDP and the country was a net exporter of energy. All appeared to be well, the overall deficit was less than one half of one per cent.

In 1967, seventeen years the Labour government was obliged to run cap in hand to the IMF as a result of a balance of payments crisis. This lead to a further devaluation of the currency. The actual balance of payments numbers were inconsequential, confidence was everything and the Wilson government offered little. The pound in your pocket was unaffected as the devaluation from $2.80 to $2.40 was to unfold. The run on the pound had been triggered by a balance of payments deficit less than 1% of GDP.

Forty three years later in 2010, the UK had a deficit on food of just 1.2% of GDP, add in the bill for raw materials and the deficit amounted to less than 1.5%. Yet the overall deficit on trade in goods amounted to 6.7% of GDP. Since 1983, the UK has been running a persistent deficit on manufactured goods which has compounded the trade deficit problem. In 2010, the trade deficit on manufactured goods amounted to -4.6% of GDP.

The surplus on invisible account could not cover the trade deficit. The overall deficit in goods and services was -3.3% of GDP. In Q4 alone the deficit was -4% of GDP.  The situation is worse than 1931, 1948 and 1967. How did the UK get into this situation?

The paper “Forty years of UK Trade” analyses the deterioration in the UK Balance of Payments position. It will be published sometime next week. For those expecting to see the rebalancing of the economy towards net export growth following the devaluation of the currency once again, it should be an interesting read. The UK needs a strong banking and financial services sector to offset the manufacturing deficit. This is no time to be bashing the banks.

Prospects for the UK balance of Payments : Coutts, K. and Rowthorn, R. 2010 Civitas 

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

Pickles, the run on the Pound and the Sterling crisis.

In 1931 the UK faced a balance of payments crisis and a run on the pound sterling which in the end led to a negation of the Gold peg and the dollar pricing of $4.86. By modern standards the deficit was no big deal. In 1929, the country had a credit balance (current account) of some £100 million falling to £30 million in 1930. In 1931 there was an estimated debit balance of £90 to £120 millions. It was this anticipated deficit on current account that led to a run on Sterling and a repatriation of assets particularly to France and the USA.

The problem for the balance of payments was a deterioration in the net receipts from invisible exports largely as a result of the fall in international trade and collapse of shipping revenues. Furthermore, the government was unwilling to raise interest rates to defend the currency given the overwhelming concern re unemployment.

The visible account had long been in substantial deficit, despite a surplus on manufactures and semi manufactures. Imports of raw materials and food, particularly food, meant that exports of manufactures and a surplus in invisible earnings had to finance the food bill of the UK population.

In 1931, food exports totaled £39 billion but the import bill was £377 billion producing a deficit of £338 million. The proposition to remedy the balance of payments problem was to eat less, import fewer manufactures and export more. Food drink and tobacco imports should be reduced by 7%, manufactured goods imports should be reduced by 25% and exports of manufactures increased by 25%.  A combination of import tariffs and duties would assist in the process.

Certain items were considered to be non-essential including shell fish, game, pickles and pickled vegetables, precious stones, feathers, flowers, plants and bulbs. The category of non essentials, totaled £13 million. The “pickled imports” alone cost the UK £6,000 such was the level of detail in the analysis. In some small way Pickles contributed to the run on the Pound.

In 1930 and 1931, the deficit on merchandise trade was £386m in both years and this was offset by invisible receipts of £400m - £420m in 1931 but falling to £285m to £315m in 1931 largely as a result of the fall in income from overseas investments. In 1930, the visible deficit was equal to almost 9% of GDP but thanks to the surplus on invisible account the current account was in balance.

It was argued there is no problem of the balance of trade so long as the “£ is free to move” as, if the balance is adverse, sterling will automatically fall to the point necessary to maintain equilibrium. “The real problem is to secure such a balance of payments as is consistent with a reasonable exchange values of the £.” 

(Committee on the Balance of Trade - report January 19th 1932). 

In September 1931 the British Government suspended obligations due under the Gold Standard Act of 1925 which required the bank to sell gold at a fixed price. As the statement from the Prime Minister Ramsay MacDonald explained. 

“In the last few days the international financial markets have been “demoralised” and seem intent on liquidating their foreign assets in a sense of panic. Since the middle of July, funds amounting to more than £200 million have been withdrawn from the London market. The withdrawals have been met partly from gold and foreign currency held by the Bank of England, and short term credits of £130 million from the USA and France.” 

By September 1931, reserves were exhausted. In a chilling note from the Bank of England to the Prime Minister, the Deputy Governor E M Harvey reported : 

Gentlemen,

I am directed to state that the credits for $125,000,000 (£25.7m)  and FFs. 3,100,000,000,  (£25m) arranged by the Bank of England in New York and Paris respectively, are exhausted, and that the credit for $200,000,000 arranged in New York by His Majesty's Government, together with credits for a total of FFs. 5 millions negotiated in Paris, are practically exhausted also. The heavy demands for exchange on New York and Paris still continue. 

Under these circumstances, the Bank consider that, having regard to the above commitments and to contingencies that may arise, it would be impossible for them to meet the demands for gold with which they would be faced on withdrawal of support from the New York and Paris exchanges. The Bank therefore feel it their duty to represent that, in their opinion, it is expedient in the national interest that they should be relieved of their obligation to sell gold under the provisions of Section 1 subjection 2 of the Gold Standard Act, 1925. I am, Gentlemen, Your obedient Servant.

And so it was, the UK abandoned the Gold Standard, the Pound was left to float, to a level which will automatically produce equilibrium. The rest “as they say” is history. 

In Q4 2010, the UK visible deficit was 7% of GDP and the pound traded at $1.56. The current account recorded a deficit of £10.5 billion in the fourth quarter of 2010, equating to 3 per cent of GDP. UK reserves amounted to £40 billion. 

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

March of the makers - "we live by exports" Sir Stafford Cripps (1947)

Revisions to the trade data for Q4 2010 will provide little comfort to those anticipating an improvement in the trade balance. In fact it looks as the visible trade deficit is getting worse and the service sector is flagging in its efforts to offset the visible shortfall. 

The deficit in goods and services moved to an overall deficit of £15 billion in Q4 as the trade deficit soared to over £25 billion.

In the budget Chancellor Osborne talked of the march of the makers, if this sounded like the speech from Harold Wilson in the wake of the 1967 devaluation, then check out the pamphlet “We live by exports” prefaced by Sir Stafford Cripps in 1947. “The faster we can get on with production, the better off we shall be”, were the final words in the leaflet. (really cute picture charts!). History makes fools of us all. 

Worryingly, Harold Wilson was confronted with a visible deficit of just 1.5% of GDP and a deficit in goods and services of less than 1%. The UK figures for the final quarter of 2010 are running at a rate of 6% and 4% respectively on an annualised basis.

Mapping the four horses of the economic apocalypse, we have borrowing at 10% of GDP, unemployment at 8% of GDP, a visible deficit at 6% of GDP and inflation heading to 5%. All this and a trend output gap over 6%! This is no time to be bashing bankers and the potential earnings on invisibles. Have a great week-end.

Prime Minister’s Update - the Pound in your Pocket.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

Prime Minister’s update : The Pound in your pocket - lessons from history

Since 2008, Sterling has devalued by 20% but there has been no discernible impact on the trade deficit as policy makers have hoped (and as we have consistently predicted). According to policy makers, what does devaluation mean to the British Economy. Here is a quote from the Prime Minister.

“What it [devaluation] does mean is that we shall now be able to sell more goods abroad on a competitive basis. This is a tremendous opportunity for all our exporters and for many who have not yet started to sell their goods overseas. But it will also mean the goods we buy from abroad will be dearer and so for many of these goods, it will be cheaper to buy British. Because one of the great problems we in Britain have had over the past [five or six  years] has been the great increase year by year in imports of goods manufactured abroad.

Saving imports, and still more the export drive, will mean that industrial production will go up. Many industries and firms which are now working below capacity, will have a chance to get into full production. This means more work, more jobs in the development areas, because we intend to be ruthless in diverting new enterprise to those areas."

Is this the "march of the makers" speech from Chancellor Osborne? If the quote sounds familiar, it should do. But it would be even more familiar if prefaced by the words, “from now on the Pound abroad is worth less but it does not mean the Pound in your pocket, or in your purse or in your bank has been devalued.” 

The quote is from Prime Minister Harold Wilson in 1967 speaking of the 14% devaluation of the currency, “creating a great opportunity for exporters and manufacturers and salesmen, what a great opportunity for them”.

So what really happened? In 1967, the pound was devalued by 14% but in the following year, the cost of imports went up by 12.5% and the price index of exports increased by 8%. The following year 1969, export prices rose slightly ahead of imports but by the third year any price gain had been eroded. Import costs and export costs had both risen by 20% compared to 1967. In volume terms by 1970 import and export volumes had risen by 28% compared to 1966. (Source Pink Book ONS).

There had been no relative gains to prices or to volumes relative to imports. Devaluation did little or nothing to solve the problems of the British Economy in 1931, 1945, 1967 and 1992. It  has done little and will do little to solve the problems of the British Economy from 2008 to 2011. 

“The pound in your pocket” is being devalued by higher inflation especially on dollar denominated prices paid for food, energy and commodity imports from abroad. The devaluation will not lead to a rebalancing of the economy. 

A rise in interest rates would increase the value of the pound abroad and the pound in your pocket as the inflation effect of international commodity price rises is moderated. Devaluation isn’t working, it never did.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

UK Trade in Goods in January - no rebalancing - it's getting worse.

Is it possible to look at the world through rose coloured glasses with your head in the sand? If you are an economic analyst it appears you can. According to the Daily Telegraph, “January’s trade figures lift hopes of an export led recovery.” 

“Economists said the figures raised hopes that trade will make a positive contribution to GDP growth in the first quarter. The Government is pinning its hopes on exports to lead the economy back to health to offset the hit to consumer spending from the austerity measures.” 

According to the Financial Times, “Britain’s deficit in trade in goods narrowed by much more than expected in January, raising hopes that the economy can rebalance away from its dependence on domestic consumption of goods and services.”

The latest trade figures released by the ONS yesterday are the source of all the excitement. The UK’s seasonally adjusted deficit on trade in goods was £3.0 billion in January compared to a deficit of £5.5 billion in December.

The trade in goods deficit was £7.1 billion in the month compared to a deficit of £9.7 billion in December. 

For some analysts, the latest data is welcome confirmation of the “rebalancing of the economy towards export led manufacturing growth. David Cameron said the numbers were "exactly the sort of rebalancing our economy needs".

No doubt the Governor of the Bank of England will be pleased as he stated during the February presentation of the Inflation Report. “I think it would be very peculiar if a 20% fall in the real exchange rate did not lead to some rebalancing. There are very few examples where if you have a persistent fall in the real exchange rate you don't see a rebalancing. You clearly see it in the figures for exports. I think there is certainly evidence that some forms of import expenditure switching is occurring.”

But here is the problem, monthly data on trade can be erratic and subject to revision. Over the latest three month period, the deficit on goods was £25.4 billion compared to £22.5 billion over the same period last year. The deficit is getting worse not better. A quick look at the chart shows the ten year data and the trend line. The deficit was too high in December and too low in January.

In the pro.manchester Economics Review we forecast the trade in goods to continue to deteriorate through the year. The January data does nothing to change this view.

In our forthcoming paper on “Forty years of UK trade data” we will explain why.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

UK inflation rises to 4% - the hawks are circling, will rates have to rise?

Inflation CPI basis in January increased to 4%, that’s twice the level of the Bank of England target. The Governor has had to write yet another letter to the Chancellor explaining why the MPC was failing in the challenge to curb inflation. In his letter to the Chancellor, Mr King said three primary factors were behind the increase, the fall in sterling, the rise in VAT and recent increases in the prices of commodities, particularly energy. 

Ultimately, he said, “inflation was as likely to be below target as it was to be above target in two to three years’ time”. Well here is the problem, as we have often said, Service sector inflation in January was 4.1%. It has averaged 3.6% for almost twenty years! That’s half the index. This was creating a problem for policy long before the fall in Sterling, the rise in VAT and the prices of commodities. Service sector inflation accounts for half the index. Goods inflation will have to fall to zero, to meet the 2% target. It doesn’t seem probable given the step change in China and the Far East. 

RPI and RPIX inflation were over 5%. This is a very uncomfortable number for policy makers. Major increases in the twelve month CPI inflation rate were Food (6.3%) , Alcohol (6.7%) Transport (7.7%) Education (5.3%) and restaurants (4.5%).

The inflation alphabet includes, the CPI, the RPI, the RPIX, the RPIY, the CPIY, and the CPI-CT. Gradually all have exceeded target rate in recent months.

Expect to see anytime soon, the CPI-MK. This is the Mervyn King special inflation index which excludes indirect taxes, housing costs, local taxes, commodities, imported prices, energy costs, core and non core items but includes anything around the 2% CPI target by special Hodrick-Prescott filter process.

The Bank of England is running out of room and stretching credibility. Views within the MPC are polarising. The dependence on “gapology” is anachronistic. Two hawks are on the wing already but more doves will morph before too long. If the first quarter GDP figures are as strong as expected, interest rates will rise as early as April or May.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

 

UK trade figures - the J curve is down the U bend ..

The trade (in goods) figures this week dashed the hopes of analysts and policy makers hoping for a rebalancing of the economy to export growth. Exports surged by 17% in the final quarter of the year but so did imports up by 18.5%. As a result the trade deficit ballooned to over £26 billion compared to just £21 billion in the final quarter of 2009.

For readers of this blog, the result will come as no surprise. We have long explained why exports increase in response to world trade with little impact from sterling devaluation. On the other hand, devaluation pushes up the cost of imports, including food, energy, raw materials, semi manufactures and export components. 

For those in business, the principle is easy to understand. Devaluation is reducing prices whilst agreeing to pay more to suppliers for import components. It doesn’t make sense for a company and it doesn’t make sense for an economy, the volume requirement will never offset the margin squeeze.

The Governor of the Bank of England said recently in Newcastle, each unhappy economy is unhappy in its’ own way. [apologies to Tolstoy]. The tragedy is our unhappy economy is unhappy, not in its’ own way but because of the persistence of policy makers to pursue strategies dominated by theories of yore, incorporating folklore, mythology, runes and ritual. Relying on Keynes is about as useful as switching off Sky News and reading Nostradamus. It is time to switch on to and accept the reality of, real time economics.

Rebalancing the economy, “waiting for the day the boats no longer come in” will be as probable as Miss Haversham’s trip to the registry office. It is time for the Old Lady to take off the cobwebbed wedding dress, dust off the cake and get out more.

Manufacturing output prices increased to 4.8% in January and input prices increased to 13.4%. The CPI and RPI figures out next week will be further bad news for the economy. Interest rate rises are inevitable. Rate rises will lead to an increase in Sterling, offsetting dollar denominated import inflation with little impact on export volume.  

The trade deficit will continue to deteriorate and for those lovers of ancient trade theory, the J curve is heading for the U bend along with the Phillips curve, the meandering NAIRU, obsession with the TROGS, (trend rates of growth) and the capacity gap. JKA.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.