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OPINION

Weak exports to keep rates on hold

Weak exports to keep rates on hold
September 11, 2014
Weak exports to keep rates on hold

Official figures this week showed that the UK’s deficit on trade in goods rose to £10.2bn in July, a 23-month high. In the latest three months, the gap widened from £25.8bn to £28.7bn. This rise in imports and fall in exports is depressing output. Other figures this week show that although manufacturing production rose in July it is lower than it was in March and April and has fallen by 0.6 per cent in the last three months compared to the previous three. "The slowdown in manufacturing raises concerns that the wider economy may also weaken in coming months" says Chris Williamson at Markit. If that happens, he says, the Bank of England could delay raising interest rates.

The weakness of exports is not due merely to the stagnation in the euro area; the region accounts for 44 per cent of UK goods exports. Exports to the euro area have fallen by 10.3 per cent in cash terms in the last 12 months, but exports to non-EU countries have also dropped sharply, by 7.5 per cent, with exports to the US falling 7.9 per cent even as the US economy has grown.

This raises concerns that the UK exporters face problems beyond mere cyclical weakness in the euro area. Fabrice Montagne at Barclays says stagnating productivity and the rise in the pound - despite its fall this week, sterling’s trade-weighted index is almost 8 per cent higher than it was last summer - "will work against a sustained recovery in manufacturing".

It’s not clear whether things will change much soon. While a yes vote in the Scottish independence referendum would weaken sterling and help exporters, it might also cause some firms to delay capital spending until uncertainty about the terms of independence is resolved which would hurt manufacturers. And although quantitative easing in the euro area should slightly stimulate its economy and hence demand for UK goods, it could also weaken the euro against sterling and so add to the UK’s lack of competitiveness.