Sterling's strength undermines UK rebalancing
The extent to which an export recovery can help the UK economy rebalance in the short term is in doubt following latest trade figures released by the ONS this week. Rebalancing has occupied centre stage in recent months as the UK looks to shake off its over-reliance on private and public debt. The two pillars of rebalancing – private investment and exports – have both weakened in recent months, and the latest trade figures have reinforced the view that export-led growth may not be a reliable pillar.
The ONS estimated that, seasonally adjusted, the deficit on trade in goods and services, excluding erratic items (such as big-ticket items like aircraft purchases, and unstable commodities), was £2.4 billion in May 2014, compared with £2.1 billion in April. The deficit of £9.2 billion on goods was partly offset by an estimated surplus of £6.8 billion on services. Although the quarterly figures show a reducing overall deficit, the recent figures are worrying and it is likely that the recent strength of Sterling has put the brakes on the UK’s export led rebalancing. This week Sterling rose to $1.71 – an increase of 14% in the last 12 months (and up 25% since 2008). Given that the UK’s main export markets are in the Eurozone, the weakness of Europe’s recovery – coupled with Sterling’s strength – suggests that the UK’s ‘rebalancing act’ is proving more difficult in practice.