EEF blog

Monthly figures for trade in April are out today, showing the deficit shrinking slightly compared with March. As we always say, these monthly figures can be volatile so some caution is needed.

The deficit on trade in goods and services stands at £2.6 billion; in March the deficit was £3.2 billion. Looking closer at the stats, the deficit in goods was at £8.2 billion, with the surplus of £5.6 billion in services offsetting that number. The narrowing of the deficit is mainly due to the UK's trade in goods with the EU, with estimations showing that imports from the EU fell by around £1.3 billion in April.

Europe

Looking wider than the month, in the three months to April, the deficit on trade with the EU rose by £1.5 billion to £15.4 billion, while the deficit with the rest of the world fell by £1 billion.

The volume of goods exports to the EU has gone down by approximately 5% between the second half of 2011 and the latest three months.

Rest of World

Exports to the rest of the world have seen an increase of 7% in the last three months.

In particular, exports to the US rose by 7% and imports were lower, so the surplus in trade in goods increased to £3.7 billion. The US is the UK's biggest single export market. Also good news with other non-EU markets, with exports to China increasing by 11% in the February to April period, and for the first time they averaged more than £1 billion a month.

In the autumn of 2011, the deficit with non-EU countries averaged £15 billion over a three-month period and the deficit with EU countries was around £11 billion. This situation is now reversed. It is important to note that prices (both export and import) have held reasonably steady in this period and so is an interesting switch to see - we will have to see if this continues.

Tomorrow brings the much awaited preliminary estimate of Q1 GDP, the first official data on for 2013. The question on many commentator and economists minds as they wait for the release is whether or not the UK will enter a feared triple dip.

Most economists are expecting GDP to be broadly flat, with many predictions falling between the -0.1% and +0.1% range.

What hints can other indicators give us?

Production: A recent blog by my colleague Felicity showed that manufacturing output will have to grow 1.6% in March to avoid contraction in the first quarter of 2013. While this level is not unprecedented given the monthly volatility we have seen in manufacturing output, it is almost certainly looking at a quarter of contraction. Clearly there is a lot going on within the sector so this will not be the case for all sectors - Aerospace and Mechanical have been more positive recently.

Looking more widely at all of production, there is a greater chance of production positively contributing to growth. Production output will be set to grow if March output contracts by less than 0.3%.

Trade: The overall trade deficit improved in January but worsened in February. We will need to see further improvement in the deficit in March for trade to not be a drag on growth over the quarter.  Export growth has been negative with exports reducing 2.1% and 2.7% in January and February respectively.

Industry indicators: Euro area PMIs have continued to show contraction across Europe, which has made conditions difficult for UK companies exporting to the EU. The US and Chinese manufacturing PMIs have been signalling expansion but at a slower pace. EEF’s Business Trends Survey shows the balance of 1% of companies saw output fall in the past three months but a balance of 22% are expecting them to pick up in the next three months. 

All up GDP is on a bit of a knife-edge and could go either way. For the record, we are expecting no growth in GDP over the quarter.

Does the sign really matter?

Whether GDP in the first quarter of 2013 is positive or negative is not really the key issue. Looking at the path of GDP over time it becomes obvious that GDP has been broadly flat for the past 18 months or so (see chart below). And if GDP growth comes in within the expected range, whether positive or negative, we will see a continuation of this trend.

GDP growth broadly flat for the past 18 months

GDP, chained volume measure, seasonally adjusted, 2009 prices

 
So, with growth still eluding us, the real concern shouldn’t be on whether we have entered a triple dip – which, if it does eventuate, could very well be revised away over time. The more important issue should be how can we get growth back on track? We are missing an overarching plan for growth, that will drive decisions and protect those areas of support that are most important for the long-term competitiveness of the UK.

In recent weeks sterling has been falling.

One pound will now buy you about €1.17. On January 1st this number was €1.23; you could have had an additional six Euro cents for every pound you traded as little as a month ago.

The reasons are better sentiment about Europe, and weak UK GDP data.

This has been brought about largely by better sentiment with regards to the Eurozone. As exits from the currency region have looked less likely, so the Euro has become stronger. However, the pound has also fallen more recently following poor GDP numbers announced on the 25th January.

These GDP numbers suggest that the UK economy shrank again in the fourth quarter of 2012, and a fabled ‘triple dip recession’ is looming. Although we expect some growth in every quarter this year, a weaker 2012 hits our forecasts for 2013, and the impact of last week’s data – taken in isolation – would imply that the UK economy will now grow a meagre 0.8% this year. 

But nothing ever happens in isolation, and as sterling falls, there is the inevitable question as to whether this will benefit the economy.

There are some benefits associated with a weaker currency.

The good news is that a weaker pound should be good for exports. We forecast that if the pound were to remain at its current level throughout 2013, then exports would be about 1% higher than in our baseline forecast.

This would be positive for the economy, and GDP growth would be around 0.2 percentage points higher than in our baseline scenario.

But the benefits of depreciation don’t always play out in reality.

As we saw earlier in the recession, when sterling fell markedly, exports did not perform anything like as strongly as expected (see this blog from 2010 where we’ve discussed this issue)

Andrew Sentence explained this pretty neatly in an article for City AM last week.

“Exporters in a mature industrialised economy like the UK do not respond to short-term currency movements... British exports are… not highly price-sensitive. Within manufacturing, our main exports are high value-added products which sell on the basis of quality and technology.”

And there are losers from a weaker currency too.

In addition, even if a weaker sterling is good for exporters, it’s not great news for companies that import a large proportion of their inputs, and it’s not good news for consumers. Because weaker sterling increases the prices of imports, a depreciation of the exchange rate will boost inflation.

Under our depreciation scenario, CPI would average 2.8% over 2013, compared with our current forecast of 2.2% this would further increase the squeeze on households (knocking 0.2 percentage points off growth in consumption in 2013) and this may lead to increased wage pressure.

Nonetheless, weaker household spending offset by stronger exports would be positive, in the sense that this is part of the rebalancing our economy needs to see, but this can’t be guaranteed. In particular, if trouble erupts in Europe again, there may be further swings in exchange rate, that more than negate the advantages of a depreciation. 

Exchange rate volatility poses challenges for companies.

Unstable currencies can be hugely problematic for companies who are engaged with international markets. A volatile exchange rate can make it difficult to set prices and erode margins within a matter of weeks.

In our recent Executive Survey, 37% of manufacturers told us that they saw significant movements in exchange rates as a key risk to their business in 2013, with medium and large sized companies – those more likely to be exposed to multiple export markets – particularly concerned about this risk.

While there are reasons to think sterling’s recent depreciation might benefit the UK economy, things are rarely as straightforward.

Further reading: Sterling depreciation... a side note

Last week I had a look at what we are expecting to happen to manufacturing sectors in the UK in 2013. Today I look at some international and global indicators.

Overall 2013 is looking brighter than 2012 with global growth, world trade and stock market prices picking up. Inflation and real commodity prices are expected to fall. Yet challenges and risks remain including on-going issues in the Eurozone and the stability of the middle-east so we do not expect the year to be plain sailing. Our own Executive survey shows that UK manufacturers are expecting things to pick up in 2013 but they also recognise both the risks they will face and the opportunities that exist in the coming year.

Guest blog from UKTI Open to Export 

A new online service that helps small and medium-sized businesses (SMEs) to export was recently launched by UK Trade & Investment (UKTI) and hibu (formerly Yell).

The initiative was first announced by Prime Minister David Cameron in November last year, and gives small businesses seeking to export the opportunity to access practical advice and have their questions answered by professionals including UK trade officers in Embassies and High Commissions, prospective and existing exporters, lawyers, accountants and independent trade advisors.

We know from small businesses that they often struggle to find the information and contacts they need to take their business overseas. They can register on the site for free, connect and engage with the exporting community and access a customised store offering products and services that will help them trade abroad.

At its launch in October 2012, Lord Green, Minister of State for Trade & Investment, said: “Supporting more small and medium sized enterprises to export is a key part of the government’s plan for growth.”

The Prime Minister outlined this as a national challenge last year, targeting a further 100,000 British businesses exporting by 2020 and the doubling of export receipts to £1 trillion.

“Half of the UK’s exports, by value, already come from SMEs. Open to Export will provide practical assistance, advice and support to other businesses looking to make that crucial first step to sell into foreign markets.”

Almost 11,500 unique users per month are already using the site, with access to more than 2,000 pieces of content and event information from 70 different organisations. Topics covered online range from managing international payments and employment visas, to choosing a translation provider and the benefits of attending global conferences.

Open to Export was successfully trialled in the summer and some examples of companies already using the service include Jackie Hutchings, Marketing Director of Wiltshire start-up Zlimm123, who found help in taking her online slimming programme to the US. Julian Hucker, CEO of Nottingham based Esendex, a leading provider of Business SMS services and platforms now knows the intricacies of opening a business bank account in German…..while Sally Guyer of the Cambridge Raincoat is now exploring the different types of funding available to help her sell her UK manufactured raincoats overseas.

Exports are vital for the country’s economic recovery.  The latest research shows that firms that export generate an average growth of 30 per cent after exporting for just two years.

We therefore encourage you to take a look at www.opentoexport.com and see how the service can help you take your business further today.

Trade statistics have been published today with some positive movements in numbers in Q3 after the numbers in Q2 showed the overall trade deficit increasing.

Overall, the UK deficit in goods in 2012Q3 was down £2.7bn on the quarter at £25.4bn compared with a deficit of £28.1bn in Q2. Goods exports were up 2.6% on the quarter with goods imports down 0.7%.

Manufacturing had a pretty good month in September too driven by buoyant sales of chemicals to Europe and continued growth in capital goods exports to non-EU markets.

Both EU and non-EU good exports were also up on the quarter at 2.2% for EU and 3% for non-EU. As usual there is a varied picture looking at individual markets; exports to France and the US increased again after a fall in Q2 and goods exports to China have grown in four out of the past five quarter.

Back in August, we said that 2012Q3 will need to see a bounce back after Q2 so positive news that this has happened given the goal of doubling exports to £1 trillion by 2020.

That said, more export driven growth is what our economy really needs at the moment – a job made more difficult by continuing problems in Europe. The Chancellor’s Autumn statement in a few weeks time needs to focus minds across all government departments on growing the number of companies investing and exporting in the UK.

On a side note... UKTI has recently launched a new website, Open to Export, providing a digital community for SMEs wanting to access export related guidance, support and tips. Businesses can ask questions with experts, service providers and peers providing advice and information as well as accessing articles on markets and viewing current opportunities. A useful online avenue of support and help for businesses wanting to grow by exporting.

As Felicity pointed out in her blog yesterday, we face a substantial challenge getting the economy back on the path to growth. Without an explicit growth strategy, policy pulls in different directions making the task even harder.

The fiscal mandate provides a clear path towards reducing the deficit – all parts of government are committed to achieving, the OBR measures progress towards it, the chancellor is accountable for it and it can be explained in less than two minutes.

We need something equivalent for growth, we need an industrial strategy.

Key components of our industrial strategy:

1. A vision for the economy

2. Coherence across government

3. Accountability

The vision (in two minutes)

The vision should provide a clear, simple and bold statement that gives businesses a compelling reason to invest here.  Like the fiscal mandate, our vision for the economy can be set out in two minutes.

_______________________________________________

The UK needs to generate better balanced growth and maintain its position as a leading economy. Four ambitions, set out below, spell out the vision for the economy and can be used as a compass to make sure we are on the right track.

Ambition 1: More companies bringing new products and services to market

Ambition 2: More globally focused companies expanding in the UK

Ambition 3: A lower cost of doing business

Ambition 4: A more productive and flexible labour force

_______________________________________________

Why these ambitions?

Ambition 1 

The UK must be a leading destination for all aspects of innovation to anchor production and compete with rising R&D intensity across the world. We know that UK manufacturers are planning for growth and they are innovating.

» If we have More companies bringing new products and services to market companies will be investing and innovating which is central to supporting their ambitions to grow.

Ambition 2 

The UK must be global in its outlook and create a dynamic business environment that supports high-value investment and job creation. Manufacturers have an appetite to invest, we need to give companies every reason to do it here in the UK.

» If we have More globally focused companies expanding in the UK we will know that the UK business environment is competitive and companies have good reasons to invest in the UK.

Ambition 3 

A competitive business environment is important but the job is not done in some areas, such as energy costs. The UK must provide a stable, predictable and competitive regulatory environment and cost base. 

» If we have A lower cost of doing business companies will be supported to grow with more cash available for innovating and investing and the UK will remain a major destination for foreign investment.

Ambition 4 

Skills needs are increasing and companies are struggling to attract the people they need. The UK must have the talent that a diverse and agile industrial base requires to be competitive in 21st century global markets.

» If we have A more productive and flexible labour force firms will have the right skills to respond to shifts in demand, changing customer needs and economic factors.

Trade data out today and it's not a pretty picture for 2012q2.

The deficit in trade in goods (ex oil) increased more than £2.5 billion in 2012q2 compared with 2012q1, with the overall trade deficit increasing by more than £3 billion. This doesn't bode for rebalancing our economy towards generating more growth from trade.

Our gold, silver, and bronze medal export destinations of Germany, the U.S., and France each saw falls of around £400-500 million in exports in 2012q2 (but conversely imports from Germany and the U.S. actually rose slightly).

More positively our gold medal export destination for growth, South Korea, saw UK exports continue to increase (by over £350 million) in 2012q2. China, our silver medal growth destination, was largely static.

So what to make of all this?

As we noted in our press comment, it's important not to get too worked up given the one-off factors in 2012q2 especially the Jubilee holidays but also the weather.

But on the other hand 2012q3 will need to see a serious bounce back to avoid the conclusion that rebalancing is off track.

What is the government's role in promoting exports as part of focusing *110%* on growth?

Three noteworthy mentions:

Strategic goal of doubling exports to £1 trillion by 2020

UKTI support for exporters

UKEF - finance products for exporting

The government's goal to get exports to £1 trillion was announced around the time of Budget 2012. It certainly is ambitious...requiring similar export growth to that seen in fast-growing export countries like South Korea every year up to 2020. But it is an important - and measurable - benchmark by which the government can hold its more detailed export promotion activities to account.

UK Trade and Investment is an effective government agency providing a range of services to promote UK exporters (and inward investment into the UK). Services include the Overseas Market Introduction Service that is a vital route into new markets - especially for companies new to exporting.

Then there is the recently renamed UK Export Finance agency. This agency is charged with making it easier for firms to trade by providing finance products to improve the cashflow and migitate the risk of trading with overseas customers.

While the intent of both agencies is good, the awareness of the support they offer is not so good - especially for the little-known UK Export Finance.

That's another reason the government's events at Lancaster House during the Olympics have been important - not just for highlighting opportunities to overseas investors and customers - but also to hopefully raise the profile of what support is avaiable to UK companies.

The challenge is how to build on this momentum and keep increasing awareness - this is where the government needs to think carefully about its near-universal ban on promotional/marketing spend. Is it really worth saving a few £ million on marketing spend if we're relying on trade delivering £ billions more in growth to drive the UK recovery?

Two important piece of official data for manufacturing relesed today are swimming against the tide of negative economic news. 

Firstly on trade - the goods deficit shrank in May as exports rose more quickly (up 7.8% on the month) than imports (1.5%).  By market, UK exports saw a month on month rise to both the EU (including the troubled eurozone) and non-EU countries.  While there was a particuarly strong bounce in goods trade with non-EU manrkets more noteable is that the value of these exports surpassed sales to Europe in May by nearly £650bn.  This compares to the gap of nearly £2bn in export to EU and non-EU markets a year ago.

Compared with a year ago exports to both core and periphery countries are down (in France and Germany by 9.1% and 2.3% respectively).

Over the same period exports to China and the US were up 26.3% and 11.6%.

The good news wasn't just on the trade front.  Defying the PMI gloom in May, which had put the activity indicator at a 3 year low, manufacturing output posted a solid 1.2% gain, reversing the falls in April.  Even with the inevitable confusion that will come with the additional Bank holidays in June, we shouldn't be too quick to write off a positive quarter of growth for the sector in Q2. 

But as the chart below shows, it is volatility that has been one of the primary features of the output data since the beginning of this year.  While any growth is positive, in terms of the level of output we're pretty much where we were at the start of the year. 

But one of the key points that has emerged from our discussions with manufacturers is that there isn't one straightforward story for the sector.  The woes in the eurozone are weighing on many, both in terms of the visibility of order books and what it means for their investment plans.  But as the trade data show, new opportunities have not dried up.  Indeed, there are aslo plenty of companies still out there that are marching into the second half of the year with growth in their sights.  

The downward adjustment to the second estimate of overall growth in the first quarter 2012 was disappointing to see. This was largely driven by weaker than previously estimated output in the construction and the non-manufacturing production sector. 

This headline figures does not tell the whole story and below this sits a more nuanced picture – there are some positive signs that confidence may tentatively be increasing in the economy but also signs that reinforce the challenges the UK faces.

So what do the underlying stats tell us?

Some of the interesting news includes:

• Business Investment grew by 3.6% in Q1 2012.  Within this manufacturing investment grew 5.2% and non-manufacturing grew 3.4%. 
• The net trade position deteriorated from a deficit of £4 billion in Q4 2011 to £4.4 billion in Q1 2012.

The growth in business investment is a sign that UK companies are starting to increase confidence. It is early days yet but does this signal the beginning of the long-anticipated recovery of investment?  Forecasters have been predicting investment levels to pick up for a while but at the same time the precise timing of this recovery has been continually pushed out. 

Manufacturing investment has continued to show stronger growth than non-manufacturing investment. With the exception of Q2 2010, growth in manufacturing investment has remained stronger than other sectors since late 2009.

The deterioration in the net trade position in the first quarter was a result of both higher imports and slightly lower exports. Lower exports to the EU are worrying but not entirely surprising given current events and weak growth in the Eurozone but it is comforting to see exports to non-EU countries continuing to grow. 

Ongoing challenges face UK companies, from difficulties accessing finance to the intensification of strains in the UK’s major export markets in Europe. Despite the positive business investment stats, the process of rebalancing still has a long way to go.