Overview of the week commencing 12 June
Graham Cross, CEO
Last week brought news of some improvements in the UK’s trade position (falling £2.1 billion in April) and a very minor modification in European monetary policy. Oh, and a surprising election result!
During April, the value of goods imported into the UK exceeded exports by £10.4 billion, much better than March’s £12.0 billion deficit. Meanwhile, the value of imported services far exceeded exports of the same, contributing to an £8.3 billion surplus – up from £8.2 billion in March. That leaves a net trade balance of -£2.1 billion in April compared with - £3.9 billion a month earlier.
Mind you, the monthly figures are particularly erratic. The trend over the 3 months to April sees an £8.5 billion deficit compared with a £6.9 billion deficit in the 3 months to January. That trend leaves us uncomfortable with the UK’s trade position. It’s almost a year from the Brexit-inspired 15-20 percent decline in the pound’s trade-weighted exchange rate and we are still stuck with a huge imbalance.
One of the reasons for this is that many of the imported goods that the UK exports, are sourced from overseas. That pushes up the value of imports and presents exporters with a dilemma; should they pass on higher production costs to customers or should they tolerate a squeeze on profits and take advantage of a gilt-edged opportunity to grab market share? The former seems to be the popular choice.
The Governing Council at the European Central Bank opted to maintain the main refinancing rate at 0.0 percent, the deposit rate at -0.4 percent and monthly asset purchases at a rate of €60billion.
A tiny, tiny change comes in the form of modified ‘forward guidance’. In the accompanying statement, the ECB have dropped reference to the possibility that rates could be further lowered and, in place of that, suggested that rates would ‘remain at their present levels for an extended period of time’. Indeed, Mr Draghi revealed that the council have now removed some of their ‘easing biases’.
That reflects policymakers’ upbeat vision of the future. Accordingly, the ECB upgraded its forecast for 2017, 2018 and 2019 by 0.1 percent a piece to 1.9 percent, 1.8 percent and 1.7 percent respectively. Inflation is forecast to come in at 1.5 percent this year and 1.3 percent next year.
Accounting for the peculiarities of our parliamentary system and assuming that a ‘confidence and supply’ arrangement can be maintained with the Democratic Unionist Party, the Conservatives are left with a majority of 13. That ought to be enough for the essential business of government. As it stands, we don’t think we’ll see another election before the end of the year, but who knows?
The immediate economic fallout is a little more apparent, however. The Chancellor of the Exchequer was one of those in favour of a snap election, motivated by a desire to break free from the fiscal handcuffs that the promises contained in the 2015 manifesto represented.
It is difficult to argue that Brexit will not have adverse effects on the UK economy in the short term. The worst of those effects might be mitigated with a smart policy response from HM Treasury. But that requires flexibility. Now, given the DUP’s commitment to increased spending, the triple lock on pensions and the winter fuel allowance it could be argued that the chancellor is more constrained than he was before.
The main features in the week ahead come in the form of UK inflation figures and a near-certain rate rise during the meeting of the Federal Open Market Committee.