Overview of the week commencing 15 May
Graham Cross, CEO
This week we focus on UK trade and US inflation
The UK imports a much greater volume of goods than it exports. The deficit amounted to a whopping - £13.4 billion during March. In contrast, the UK exports a greater volume of services. The surplus is currently +£8.5 billion. That leaves a monthly trade balance of -£4.9 billion, well in excess of the near term average.
All of this might come as something of a mystery, given a 14 percent decline in the pound’s trade-weighted exchange rate. In those conditions you’d expect more costly imports to slow and cheaper exports to surge. Exporters, though, have raised their prices more or less in line with the decline in sterling, offsetting any advantage a lower exchange rate might infer.
One reason for this, according to Moody’s economy.com, is that British firms ‘cannot readily reduce [their] dependence on external products in the short term’. In other words, many of the inputs into the goods that the UK exports are sourced from overseas. That pushes up the value of imports and presents exporters with a tough choice: pass on higher production costs to customers or tolerate a squeeze on profit margins.
Inflation in the US eased a little during April with the headline rate falling from 2.4 percent in March to 2.2 percent. The core inflation index – which mitigates the more volatile effects of energy prices – eased a little less, from 2.0 percent to 1.9 percent.
A slightly slower pace of inflation may give the Federal Reserve pause for thought but we still think that, as it stands, a rate rise in mid June is highly likely. The only thing that can stand in the way of that is a significant deterioration in either of the non-farm payroll numbers or wage growth estimates, neither of which are likely.
Also of note, the Bank of England's Monetary Policy Committee voted 7-1 in favour of maintaining the status quo. The last time UK rates were lifted was in July 2007 when Bank Rate was moved from 5.5 percent to 5.75 percent.
Last week also saw the first estimate for GDP in Germany during Q1. The boffins at the Deutsche Bundesbank estimate that Europe’s largest economy expanded in line with market expectations of 0.6 percent compared with the prior quarter.
Meanwhile, the Indian Ministry of Statistics and Programme Implementation reported that factory production numbers rebounded in March with a rise of 2.5 percent year on year. Still, 2.5 percent isn’t particularly impressive and does signal, to some extent, a measure of weakness at the heart of the Indian economy.