‘More balanced UK growth’: Analysts react to positive trade and industrial data

UK economists are poring over the latest set of official figures showing Britain’s trade deficit narrowed by more than expected while industrial production also beat expectations, with a lack of consensus over whether a weaker pound is bringing substantial benefits to the economy.

Here’s the round up.

From Scott Bowman, UK economist at Capital Economics:

Today’s UK economic activity data added to other evidence suggesting that the economy maintained a significant amount of momentum at the end of 2016 and implies that growth is becoming more balanced.

Specifically, on the trade deficit, which narrowed to £3.3bn in December, beating forecasts of £3.5bn and down from November’s £3.6bn, Bowman says:

The latest trade figures point to more balanced growth, with the overall trade in goods and services balance narrowing from £3.6bn in November to £3.3bn in December. Admittedly, this was largely driven by erratic items – excluding erratics the deficit widened considerably. But there was some more encouraging signs of a boost from the lower pound in the trade volumes figures. Indeed, quarterly growth in goods exports volumes accelerated from -4.9% in Q3 to 7.1% in Q4, and growth in goods import volumes slowed from 3.8% to -0.4%. This suggests that net trade should have made a positive contribution to GDP growth in Q4 after subtracting an average of 0.6ppt in the first three quarters of the year.

However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says that the surge in exports in the Office for National Statistics trade data “merely reverses prior weakness”.

December’s trade data bring a glimmer of hope that the adverse impact of sterling’s depreciation on inflation will be partly offset by a stronger performance from exports. The volume of goods exports rose by 3.1% month-to-month in December, building on November’s 7.3% jump. In addition, the combination of the 7.1% quarter-on-quarter rise in volumes of goods exports and 0.4% fall in goods imports in Q4 suggest that net trade probably boosted quarter-on-quarter GDP growth by around 1.2 percentage points.

The boost from net trade to GDP growth in Q4, however, will only reverse its 1.3pp drag in Q3. Even after December’s surge, export volumes were just 2.9% higher year-over-year, much less than the 12.6% rise in import volumes. We continue to expect the boost to net trade from sterling’s depreciation to be modest, given that the threat of trade barriers will dissuade many firms from investing to export more, and the lack of domestically-produced substitutes for the goods that the U.K. currently imports.

From Howard Archer at IHS Markit:

A key hope for the UK economy going forward is that the substantial overall weakening of the pound since the UK voted to leave the European Union in June’s referendum will increasingly feed through to boost foreign demand for UK goods and services.

Softer domestic demand is expected to increasingly weigh down on import volumes, and this could be reinforced by some import substitution resulting from the weak pound markedly pushing up import prices. The Bank of England’s regional agents reported in their February survey of business conditions that “some contacts reported increased sourcing from domestic suppliers due to the fall in sterling.”

On the better than expected industrial production – up 1.1 per cent in December from forecasts of 0.2 per cent albeit a slower growth rate than November’s 2.1 per cent, Kay Daniel Neufeld, economist at the Centre for Economics and Business Research, says:

Considering that various governments have tried to rebalance the economy away from a model solely relying on the services sector for growth, today’s data reflect a step in this direction. UK industrial production profited from stronger global conditions towards the end of the year. Both the eurozone and the US have posted respectable growth figures for the last quarter of 2016, which means good news for British exporters.

Still, it is important to remember that growth in manufacturing over the last months was largely driven by the erratic data series for pharmaceuticals with much smaller contributions from other categories. And while the weak pound is expected to translate into higher competitiveness abroad eventually, it also means higher costs for imported production factors at home. The interplay between these two opposing forces will have a big role to play in the performance of industrial production in 2017.

And Capital Economics’ Mr Bowman says:

The industrial and construction sectors still make negligible contributions to Q4 GDP growth. Accordingly, they shouldn’t cause any change in the 0.6% quarterly growth in overall GDP in Q4 to 1d.p. However, the December output figures do provide a base for more balanced growth in 2017. Indeed, we think that the expansion in manufacturing activity will exceed that in services for the first time since 2011, as the manufacturing sector gets a competitive boost from the fall in the pound, but consumer services growth is constrained by rising inflation.