UK Trade Trends Show Deterioration

In August U.K trade data are relatively upbeat as exports rise 3.5% overall and imports fall by 0.7%. But the broader picture is still disconcerting. Over three months exports are falling at a 24% annual rate as imports advance at a 13% annual rate. Over six months exports are up by less than 1% while imports are down by less than 1%. Over 12-months exports eke out a gain of 2.1% while imports are up by 3.6%.

Exports demonstrate a great deal of weakness. Capital goods exports are declining on all horizons as are basic materials. Food Feeds and tobacco exports are lower over 12-months and 3-months.

Imports show declines on all horizons only for basic materials where prices have collapsed. Imports are rising over 12-months in all other categories and road vehicle imports are both rising and accelerating.

The strength in U.K. imports is a good sign about the evolution of domestic demand. But the weakness in exports is a bad sign about foreign growth and possibly about the state of U.K. competitiveness. The pattern of U.K. trade deficits shows that there has been a steady decline in deficits until the last two months when they surged again. It is not possible to be optimistic about the trend for the U.K. trade deficit given this pattern.

While the OECD LEI marked EMU as an oasis of stability in terms of its leading economic index performance, EMU has continue to post weak growth. Recent reports on industrial output show a great deal of variation within the euro-area. This makes it difficult to pin down the degree of progress that EMU might be achieving. In August German IP fell while French IP rose and Italian IP fell as Spanish IP rose. And those are just the four largest economies in EMU.

Clearly the U.K. like every other exporter in the world is trying to sell goods in depressed global marketplace. This accounts for the bulk of export weakness. But in times such as this we find firms resort to various forms of predatory pricing so that competitiveness might be undercut and deflation spread by price-cutting. In fact the U.K. inflation gauge fell in August and is flat over 12-months. If price is an indication of health and strength that signal is missing.

The U.K. is doing better than many European economics and this past week on an eight-to-one split vote the BOE held its policy steady. And while the BOE has been making noises like those made at the Federal Reserve in the U.S. that the time is coming to start raising rates, the BOE still does not have the votes - or the economic environment- to do it. The rising imports tell a tale of solid domestic demand but the huge trade deficit and weak exports tell a different story altogether. The way to a rate hike in the U.K. may not be shut but neither does the case for one seem very clear cut and certainly not compelling. It is hard-and perhaps foolhardy- to hike rates in the midst of a global slump with plunging commodity prices but some would characterize it as an act of bravery. And, sometimes it is hard to tell the hero from the fool.