The trade (in goods) figures this week dashed the hopes of analysts and policy makers hoping for a rebalancing of the economy to export growth. Exports surged by 17% in the final quarter of the year but so did imports up by 18.5%. As a result the trade deficit ballooned to over £26 billion compared to just £21 billion in the final quarter of 2009.
For readers of this blog, the result will come as no surprise. We have long explained why exports increase in response to world trade with little impact from sterling devaluation. On the other hand, devaluation pushes up the cost of imports, including food, energy, raw materials, semi manufactures and export components.
For those in business, the principle is easy to understand. Devaluation is reducing prices whilst agreeing to pay more to suppliers for import components. It doesn’t make sense for a company and it doesn’t make sense for an economy, the volume requirement will never offset the margin squeeze.
The Governor of the Bank of England said recently in Newcastle, each unhappy economy is unhappy in its’ own way. [apologies to Tolstoy]. The tragedy is our unhappy economy is unhappy, not in its’ own way but because of the persistence of policy makers to pursue strategies dominated by theories of yore, incorporating folklore, mythology, runes and ritual. Relying on Keynes is about as useful as switching off Sky News and reading Nostradamus. It is time to switch on to and accept the reality of, real time economics.
Rebalancing the economy, “waiting for the day the boats no longer come in” will be as probable as Miss Haversham’s trip to the registry office. It is time for the Old Lady to take off the cobwebbed wedding dress, dust off the cake and get out more.
Manufacturing output prices increased to 4.8% in January and input prices increased to 13.4%. The CPI and RPI figures out next week will be further bad news for the economy. Interest rate rises are inevitable. Rate rises will lead to an increase in Sterling, offsetting dollar denominated import inflation with little impact on export volume.
The trade deficit will continue to deteriorate and for those lovers of ancient trade theory, the J curve is heading for the U bend along with the Phillips curve, the meandering NAIRU, obsession with the TROGS, (trend rates of growth) and the capacity gap. JKA
Sign up today and "subscribe" for e-mail notification of updates.
The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.
Comments