UK Trade Deteriorates...And So Does The Pound Sterling

UK exports have suddenly stalled while imports continue to press ahead. With an export mix tilted heavily to Europe where growth is slowing sharply and to the US where the expansion has never really gotten on track, UK exports have been struggling over the last six months. Over the last three-months exports actually rose at a 4% annualized rate compared to dropping at a pace of 2.5% over 6-months. But these trends pale next to import growth at a 17% pace over three-months and a 9% pace over six months. Year-over-year the two growth metrics are much closer at 11% for exports and 12% for imports. That balance has been under pressure for the past six months.

The balance of trade ballooned to 9.8bln sterling, a deficit greater than the previous month’s red ink total of 8.62 bln sterling. As a result the pound came under selling pressure on a day that Europe was also under pressure because of lagging efforts to get a new government in place in Greece and the announcement by Italy that Silvio Berlusconi is stepping down. What we still do not know is who will be stepping up in either country.

Europe is in a state of real turmoil with Italy’s borrowing costs surging to 7%. Contagion has skipped right over Spain and Portugal and gone right for the exposed Euro-jugular: Italy.

Italy is that bridge too far for Europe to defend. It is a weight too heavy for Europe to bear. Italy is among the ‘troubled EMU borrowers’ the least troubled but it is big enough and has been stubborn enough about not changing that is has thrust itself into the spot light Ahead of other that were farther down the economic road to perdition.. Italy is losing traction in a game of tug-o-war with markets.

And this is an important zone for UK exports. The troubles there do not show any sign of abating. Tough words from the UK have recently been directed from Prime Minister Cameron toward Germany aimed at the German unwillingness to do more for its troubled zone-mates.

Soon we may find the UK is not the only EU member that is not going to be forced to become an EMU member. While the rules currently do not allow for that, it is hard to see Europe expelling from EU former EMU members (or members just leaving EMU) just because they depart the currency union. And departing the currency union is looking more and probable...and desirable for some.

In the midst of all this the UK, while still a stumbling economy has maintained its imports. British MFG industrial production is up by only 2% year–over-year but its imports are up by some 12% (nominal) yr/yr. Imports of vehicles, basic materials, capital goods and food stuffs are all growing and accelerating sharply as MFG IP growth is decelerating.

The UK economy is slowing. Its domestic demand is slowing. Foreigners are taking a bigger and bigger slice of UK domestic demand truncating the multiplier process from stimulating further domestic spending at a time that domestic spending already is withering. Meanwhile, UK export success in foreign markets is slipping. All in all this is not a good picture for the UK economy or for its Conservative government. Like the US Fed, the BOE may engage in further QE to assist markets but the UK economy needs so much more than that with inflation soaring well over its ceiling and money supply growth having plunged. The UK is in a classic pickle of its own making. Whoever thought that austerity in the early stages of an economic recovery was a good idea? And this is in the county that gave us Keynes! Why has snake oil replaced economics? Who ever thought this would work (besides the Germans, of course)?