UK struggles to rebalance its economy

Wednesday 17th February 2016 07:49 EST

This last week has seen economic, sentimental and political factors drag cable to a 15 month low.

The tone was first set with statistics on the UK's goods trade, showing a widening gap with the rest of the world by an additional £1.9bn to £125bn in 2015, official figures show. The overall deficit - the difference between the amount the UK imports and what it exports - stood at £34.7bn in 2015.  The Office for National Statistics also warned the latest figures would have a negative impact on its second estimate of fourth-quarter economic growth. It will publish its second estimate of fourth-quarter economic growth on 25 February.

Furthermore, Britain is very good at exporting services - financial, tourism, creative and legal - where the UK's trade surplus hit a record £90.3bn. However, it is notoriously bad at increasing the exports of goods as the UK struggles to rebalance its economy away from consumer consumption towards manufacturing. The strength of the pound for most of last year is only exacerbating Britain's difficulty selling abroad. A large part of the fall was however accounted for by depressed oil prices, which meant the cost of oil imports fell in value terms to their lowest level since February 2009. In the three months to the end of December, the UK's trade deficit stood at £10.4bn, compared with £8.6bn in the three months to the end of September.This economic data was solidified by the sentiment of Chancellor George Osborne as he warned that the economy is facing a "dangerous cocktail" of risks in 2016, ranging from slowing global economic growth to volatile stock markets and the continuing slump in oil prices. U.K. Manufacturing production fell for the third straight month in December. Furthermore, GBP fell to 15 month lows against a basket of currencies amid global fears of a slowing economy and a lack of movement on interest rates. Consequently, 10 year gilt yield slid to a record low of 1.2250 percent in the morning session before recovering to at 1.305 percent in afternoon trade. Interest rate markets are not pricing in a BOE rate hike until 2020 with Sterling overnight interbank average rates pricing in the chance of a rate hike in five years’ time. In addition, there is sentiment within the money market arena that some are factoring in a good chance of a rate cut in the coming months which would naturally push GBP even lower with the BOE leaving rates unchanged at 0.5% since March 2009.

The Eurozone has received little economic data over the previous week and has therefore staying resilient in 2016. Portuguese government borrowing costs shot up to their highest level since 2014 yesterday. Portugal’s government debt is currently stuck at around 130 per cent of GDP. The interest rate on the government’s 10-year bonds rose above 4.4 percent. However, in a Portuguese budget approved last week by the European Commission, austerity will be harsher this year than in 2015. Despite the budget receiving approval, German finance Wolfgang Schauble said today that loosing the purse strings “would be very dangerous for Portugal”.More positively, annual GDP growth for the European Area came out in line with expectations at 1.5% (down on last month’s print of 1.6%), but quarterly GDP growth was better than expected, at 0.3% versus an expectation of 0.0%.

Lastly, President Mario Draghi made a speech which signaled potentially further monetary policy easing is likely in March stating that the ECB is ready to do its part. Mario confirmed this when he said, “in the light of the recent financial turmoil, we will analyse the state of transmission of our monetary impulses by the financial system and in particular by banks”, the ECB will examine the impact of renewed declines in energy prices and “if either of these two factors entail downward risks to price stability, we will not hesitate to act.”

The US has had some slightly encouraging data released mixed with dovish tones from Federal Reserve chair Janet Yellen while testifying to Congress. Yellen’s remarks caused dollar weakness against all major currency pairs as investor’s interpreted the speech as dovish. The salient message delivered was that additional rate hikes are still firmly on the agenda, however, the execution of these will very much depend on the stabilization of global markets. Looking at Fed funds futures rates, they show that that market is suggesting an unconvincing 6 percent chance of a rate increase in March. On the second day of testifying, Yellen gave a divergent directive on interest rates by stating that she is not ruling out negative interest rates as an applicable monetary policy for the US. These remarks seem brought on "in light of the experience of European countries and others that have gone to negative rates, we're taking a look at them again, because we would want to be prepared in the event that we needed to add accommodation.” With regards to data released, US retail sales for January came out stronger than expected, with monthly retail sales in January growing by 0.2% versus an expectation of 0.1% and the ex-Autos adjusted retail sales figure rising by 0.1% versus an expectation of 0.0%.

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