Can UK exports boost the recovery in 2010?
Mon, Mar 1 2010, 13:36 GMT
by Trevor Williams
Figures for December showed a widening in the UK’s trade deficit in goods with the rest of the world to £7.3bn from £6.8bn in November. This represented the worst monthly outcome since January 2009 and called into question the expectation that UK growth in 2010 will be boosted by ‘net trade’, as exports exceed imports. In December, UK imports of goods rose by 5.2% while exports rose by 4.5%. Figures in the second release of UK gdp for Q4 2009 highlight how difficult the path to a strong economic recovery will be in 2010. Although Q4 growth was revised up from 0.1% in the first release to 0.3% in the second, all of the growth came from stocks and government spending. A slower pace of destocking added 0.5 of a percentage point to Q4 growth, while government spending contributed a further 0.3 of a point. UK net trade (total exports minus total imports) deteriorated, however, depressing Q4 growth by 0.2 of a percentage point, despite signs of a pick-up in global demand and the competitive boost afforded by the sharp fall in the pound.
In other words, had it not been for the stocks and government spending components, which are unsustainable sources of growth over the medium term, UK Q4 GDP would have posted its seventh consecutive negative reading. In 2009 as a whole, net trade did contribute positively to gdp growth, but in Q4 this contribution became negative, see chart a. What is surprising is that the worsening trend of net trade in 2009 occurred even though the pound was weak on a trade-weighted basis against the UK’s top trading partners, and the economy contracted by 5% in the year as a whole. The latter - weaker growth in domestic demand - usually contributes to a lessening of import demand. In addition, a weaker currency is also expected to contribute to a rise in exports and a fall in imports. This combination is supposed to lead to a narrowing in the external deficit and hence to a positive contribution of net trade to real gdp growth.
For last year as a whole, the story of a positive contribution from net trade does seem to hold true. While exports dropped 10.9% in 2009, imports dropped by 12.1%, leading to a net contribution to real gdp growth of 0.7 of a percentage point (exports took 3 percentage points from gdp but imports took 3.7 percentage points off gdp so a relative gain of 0.7 of a point occurred). But as the chart shows, as the year progressed, the positive contribution of net trade to gdp lessened dramatically - so much so that by Q4 it had turned negative for gdp. Although we are hopeful that net exports will provide a meaningful contribution to growth over the coming quarters, so far there is little sign that either (i) more expensive imports are encouraging a shift towards domestic demand; or that (ii) UK exporters are using the competitive advantage from the fall in the exchange rate to gain market share. Worryingly, our analysis (see Weekly - 8th February), suggests that UK exporters have responded to the decline in sterling by raising prices. While this should have some positive spillovers in terms of supporting domestic demand, it is not as effective for the economy as a rise in the volume of exports by allowing export prices to fall in line with the weaker currency.
But factors other than a desire by firms to just widen profit margins may also be at work. First, chart c shows that the improvement in the trade balance coincided with a sharp fall in the effective exchange rate index, but this fall has partly reversed and now so has the improvement in the trade deficit. This would imply that a greater degree of sterling weakness at a lower permanent level is required to lead to a sustained improvement in net trade. Second, the UK deficit in goods is so poor that only two sectors, chemicals and fishing, are in surplus, see table 1. Although the trade deficit in goods for 2009 as a whole improved to £81.9bn after hitting a record of £93.4bn in 2008, it remains large at 5.9% of gdp. As chart c shows, only a large surplus in services, 3.5% of gdp, brings the UK’s total external deficit down to a manageable 2.4% of gdp.
The third factor is that the current mix of UK export markets may not be the best combination required to lead to an improvement in net trade. Chart d depicts the UK’s ten top export markets, as a share of its exports of goods in 2009. Top of the list is the US; bottom of the list is Sweden. Looking at economic growth in 2010, based on consensus forecasts for these countries (see chart e), shows that the strongest growing market, China, accounted for just 2.3% of UK exports in 2009. Admittedly, the next fastest growing of this list, the US, accounted for 15% of UK exports. However, the other economies, (aside from Sweden that absorbed 1.7% of UK exports) are expected to expand fairly modestly or contract in 2010. This means that 2010 may not see as much of a contribution from net trade as expected, making it harder for the economic recovery to build momentum. In short, the headwinds facing the UK economy in 2010 remain substantial, even after a poor 2009.
