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Bill Jamieson That’s enough shocks, thank you
COMMENT
BILLJAMIESON | Executive Editor of The Scotsman
That’s enough shocks, thank you
The year 2015 has already done enough to test confidence in continuing recovery – and the nerves of UK exporters and investors.
First it was Greece, followed by jitters over a pending rise in US and UK interest rates. Then came the shock waves from China, as the country’s stock market tanked, causing vertiginous falls in markets worldwide.
Given the strength of the pound for most of this year and the notable weakness of the euro, our exporters have done well to notch up a gain of any sort. Britain’s trade with the rest of the world was looking to be enjoying a solid if fitful recovery in the second quarter of this year. The deficit on trade in goods narrowed by £3.0 billion to £27.4 billion, helped by a £3.1 billion rise in exports to £74.5 billion. Exports of chemicals and fuels were to the fore, with exports of machinery and transport equipment up by £0.6 billion. However, June saw a relapse with a £9.2 billion deficit in goods trade.
UK companies have long been waiting for a demand recovery in continental Europe. But with one or two notable exceptions it is taking an exasperatingly long time to materialise. Recent figures on eurozone GDP were disappointing. An already pallid growth rate of 0.4 per cent in the first quarter fell back to 0.3 per cent in the second, leaving output just 1.2 per cent higher than a year ago.
France and Italy, the eurozone’s second and third largest constituents respectively, were the main culprits. Output in Italy is just 0.5 per cent higher than a year ago, while France stagnated, largely due to a sharp slowdown in consumer spending.
These feeble performances are all the more remarkable considering the stimulus effects of lower oil prices – which should have acted like a tax cut – and the boost from Quantitative Easing pursued by the European Central Bank since March.
A bizarre feature of the Eurostat figures is the sprightly looking performance of Greece despite the inability of banks to lend and the government stopping payments to commercial creditors. The country’s GDP is reckoned to have grown by 0.8 per cent in the spring, while estimates for previous quarters were also revised up.
This has flummoxed economists. One explanation may be that consumers spent some of the cash they withdrew from bank accounts ahead of a feared Grexit and re-instatement of the drachma for big ticket purchases such as cars which might hold their value. Overall, however, the outlook remains bleak.
Yet again it was Germany that put in a solid performance, with second quarter output rising 0.4 per cent, nudging up from 0.3 per cent in the opening three months. Whether this will be sustained is in question, given that China has been a prime market for German investment goods and luxury cars.
Overall, this lack of vigour across the eurozone is a worry. Should the shock waves from a China slowdown hit global growth, there is little in the eurozone’s armoury of stimulus tools that has not already been fired.
Shrinking exports
This combination of feeble eurozone growth and a strong euro relative to sterling is taking its toll on the continent’s pre-eminence as the UK’s principal trading partner. UK goods exported to the region fell to a record low in April.
Just 45.1 per cent of the goods that the UK exported that month went to the EU, down from 52 per cent in the previous year.
The proportion of the UK’s goods exported to the EU has been shrinking since the early 2000s, when it accounted for around twothirds of total UK goods exports.
What gives this trend strong political resonance is that, without an immediate and dramatic improvement, supporters of the UK’s membership of the EU will find their hand weakened. They will no longer be able to claim, as once they volubly did, that the UK’s trade with its biggest trading partner would be put in jeopardy. At the same time the trend strengthens the hand of those who argue that the UK’s best prospects as a trading nation lie with the EU.
Said Nina Skero, of the Centre for Economics and Business Research, “The figures suggest that although there has been a rebalancing away from European markets, more efforts are necessary to successfully target higher-growth regions.”
The prospect of a referendum, she added, “only intensifies the need to develop a viable strategy for targeting faster-growing economies outside Europe.”
Others argue that a consistent drop in the importance of the continental market should embolden Prime Minister David Cameron’s hand in renegotiating the UK’s membership.
However, the UK’s referendum on EU membership is still some way off – and may be pushed back if there is no early end to the immigration crisis. And for the moment exporters would be grateful for any sign that the Chinese authorities can cushion the impact of the country’s growth slowdown and limit the impact on the global economy. The year has been eventful as it is without more shocks. n
