Tag: trade deficit

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Too soon to crack open the champagne?

Is there finally cause to celebrate? Government borrowing is lower than expected. Initially, public sector net borrowing for 2009-2010 was forecast in the Pre-budget Report to be £178bn, but official public figures have reduced this to £170 bn. The fall in government revenues has not been as big as predicted and as a result, borrowing this year is likely to be between £5bn and £10bn less than expected. But, let’s not crack open the champagne quite yet, as February’s figures for public sector net borrowing are still about 41% higher in 2010 than in the same month last year.

Whilst the UK is predicted to under-shoot its public-sector net cash requirement made in the Pre-Budget Report for 2009-2010, government borrowing remains at a record high and the level of the deficit is still a worrying 12% of GDP. It is, therefore, hardly surprising that the European Commission wants the UK to bring its deficit down faster than the current government plans – and the Commission is not alone. There is considerable debate at the moment between those who want the government to bring the deficit down quicker to appease the market and those who want the government to start taking strong measures only when the recovery is well established. Their fear, very much in the Keynesian school, is that cutting too soon, by reducing aggregate demand, would push the economy back into recession.

If government spending is to be restrained, can we rely on export-lead growth? The fall in the value of our currency over the past two years should have meant a boost for exports. With a weaker pound, export growth was expected to be strong and allow us to export our way out of recession. See the news blog Expecting too much from exports. However, with figures in January 2010 showing the biggest trade deficit since August 2008 (£3.8bn) and with the volume of exports down by 8%, this may not be the case. Whilst the credit rating of the UK remains at AAA, experts say that the government should be aiming to reduce the deficit more quickly in order to retain this rating. So, although there is some good news (government borrowing will only be £170bn!) and exports are likely to increase as the global economy recovers from recession, significant problems in the UK economy still remain.

Articles

Row over leaked EU deficit report AFP news (17/3/10)
Government borrowing less than forecast BBC News (18/3/10)
Borrowing update cheers Treasury Financial Times, Chris Giles (19/3/10)
UK trade deficit widens to biggest in 17 months BBC News, Stephanie Flanders (9/3/10)
Government borrowing: what the economists say Guardian (18/3/10)
Darling to use higher revenues to cut debt Financial Times, Chris Giles and Jean Eaglesham (19/3/10)

Data

Public sector finances. February 2010 Office for National Statistics

Questions

  1. Why have government revenues been falling?
  2. What is the difference between the public-sector net cash requirement and public-sector debt?
  3. Why is a weak pound good for exports?
  4. As the global economy recovers, UK exports should begin to rise. Illustrate this idea with a circular flow of income diagram for the UK and the rest of the world.
  5. What are the arguments (a) for and (b) against reducing the government deficit now?
  6. Should the Treasury be celebrating these latest figures, or is the UK economy still in a bad way?
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Expecting too much from Exports

The pound is regarded as an international currency, but its value has been declining throughout the financial crisis. Indeed, this downward trend is one of the factors that has prevented the recession in the UK from getting worse. As the exchange rate changes, the relative competitiveness of a country’s products changes and this therefore affects exports and imports.

However, despite a declining pound, exports from the UK have fallen and this has contributed to an unexpected global goods trade deficit in January of nearly £8 billion – the largest level since August 2008 and well above the forecast of £7 billion. This is putting further pressure on the pound. A key to the UK’s economic recovery was argued to be growth in exports, but this now appears to be a somewhat forlorn hope. The figures released show that exports slumped 6.9% to £19.5 billion in January, whilst imports only fell by 1.6%. A contributing factor might be the bad weather that hit the UK in January, but the long-term decline of manufacturing in Britain has also been put forward as a reason.

The following articles consider the UK’s trade deficit and the possibility of an export-led recovery.

Articles

January trade deficit widens as exports fall Guardian, Kathryn Hopkins (9/3/10)
UK trade gap widens to worst in 17 months BBC News (9/3/10)
Exports plunge heaps pressure on pound Independent (9/3/10)
Pound slides back against dollar and euro Guardian, Ashley Seager (21/9/09)
Trade gap widens despite weak pound Financial Times (9/3/10)
UK exports plunge by £1.4 billionThe Press Association (9/3/10)
Pound falls again on deficit fears Guardian (9/3/10)
UK trade gap widens as exports sink Wall Street Journal, Nicholas Winning (9/3/10)
Rebalancing, deferred BBC News blogs, Stephanomics Stephanie Flanders (9/3/10)
Global recovery is helping UK, says Bank of England’s Sentance Guardian, Larry Elliott (18/3/10)
Pound Declines as Investors Bet Bank of England Will Hold Rates BusinessWeek, Lukanyo Mnyanda (20/3/10)

Data

For UK balance of trade data, see UK Trade (Office for National Statstics)
For exchange rate data, see Statistical Interactive Database (Bank of England)

Questions

  1. How is the value of the pound determined?
  2. Illustrate a depreciation of the pound on a diagram. What are the factors that could cause this?
  3. When the value of the pound falls, why should UK goods become more competitive?
  4. Explain why an export-led recovery was a possibility for the UK economy. How can we use the transmission mechanisms to help explain this?
  5. Despite a weak pound, exports have fallen. What are the explanations for this?
  6. What are the consequences of a widening trade deficit and how can it be tackled?