Yesterday, amongst the disbelief and shock following on from Donald Trump’s historic victory, there was some good news with the release of the UK trade statistics for September; another important indicator of the performance of the UK economy three months on from the EU referendum.
The data released by the ONS, showed that in the three months to September the deficit on trade in goods narrowed by £1.5 billion to £33.2 billion. The cause for such a narrowing was the impressive growth in exports, which increased by £4.5 billion (6.1%), whilst imports saw a slightly more modest increase of £3.1 billion (2.8%).
This is positive news for the UK economy, and in particular for the trade-intensive manufacturing sector, with these trends illustrating that exports are heading in the right direction, building on the strong momentum seen since the beginning of the year.
So what is the cause of such a boost in exports?
The popular and logical answer is the weaker exchange rate, with economic theory suggesting that a depreciation of the pound makes UK goods more competitive on international markets and hence boosts demand for them. While this is likely to be true in more commoditized sectors where the beneficial effects should filter through relatively quickly, the increase in exports cannot be wholly attributed to this. This is particularly true of the manufacturing sector where we believe the effects of a weaker pound have yet to be felt. Instead the likely cause for the jump in foreign sales is brightening demand conditions in international markets, illustrated through improving manufacturing PMIs across Europe.
The effects of a weaker exchange rate will however be felt in manufacturing over the coming months, with the depreciation of sterling expected to support export performance across manufacturing sub-sectors. But not all is good news; whilst a weaker exchange rate makes UK goods cheaper overseas, the adverse effect of this is that it makes imports more expensive. Consequentially input prices increase, thereby raising the cost of production and squeezing manufacturers’ margins. The magnitude of this depends on firms’ reliance on imported raw materials and intermediate inputs. Eventually firms will pass these higher costs through to customers in the form of higher output prices, making the effect of the depreciation on exports more finely balanced.
Overall the UK economy has performed much better than anticipated since the referendum, with the increase in exports in Q3 playing an important part in this recovery. This is cause for comfort in the short run at least. The medium and longer terms are however shrouded in uncertainty, with the prospect of the UK leaving the EU only compounded by yesterday’s US presidential result and the increasing anti-globalisation sentiment across the world. What the future holds for UK trade relations is anyone’s guess…