DISTURBING SIGNS OF EU HEADING FOR SLUMP
This morning’s economic information from the Office of National Statistics leaves both the Government and the Bank of England between two stools: for while the trade gap with the EU is trending lower, some of the data relating to inflation are alarming. Osborne and King remain damned whether they do or don’t.
There was a healthy increase of over 8.5% in UK exports to the EU in October, but the rate of increase is trending downwards: compared to November 2009, the November 2010 figure was 11.2% up.
However, imports from the EU were up only slightly…..and the rate of increase has slowed – from 8.1% YOY to 1.3% month on month.
The most likely interpretation of both import and export figures is that they reflect slowing growth within the EU. In short, the Union is producing less and consuming less. This is only going to get worse in the coming year: the OECD has downgraded the EU’s growth figures recently. Ominously, the pessimism was especially applied to Spain. It saw the Spanish economy shrinking this year – and at best growing under 1% next. Needless to say, Spain’s protestations of good health are based on bigger growth figures.
The EU remains a stagnant bailout waiting to happen.
UK inflation is also continuing its ominous rise. Most people are not good with inflation figures, because they should be (in my view) examined at four levels: the actual increase, the percentage increase, the percentage rate of increase, and the extrapolated rate over a year ahead. With a rate of increase up by 3% (and a level per se of 3.3%) things don’t look too bad – until you consider that this is happening with very little real economic growth and no QE for quite some time now.
Further QE on an effective scale is thus a non-starter – for two reasons: the Treasury is skint, and Mervyn King would be mad to stimulate further inflation growth by printing money now.
More pointedly, The Slog is very worried about some of the sector by sector increases in inflation. With our manufacturing and agriculture so weak, these figures suggest yet again that rising import costs lie behind much of this underlying inflation. As our Pound fails to recover much ground against other currencies, the price of importing things like food and clothes rises for the distributor…and depresses margins in some cases.
Food and soft drinks rose 1.6% during November, clothing and footwear 2%, and household equipment 1.6%. These represent annualised rates of 19.2%, 24% and 19.2% respectively. I’d say those figures are cheering up the Unite Union and their fellow-travellers no end.
The Government’s room for manoeuver is getting tighter, and the lessons are clear. Based on previous experience, they are unlikely to be learned by the Coalition; but for the record, without a serious investment in UK agricultural output, huge diversification away from trade with the EU, deeper savings and a better international view of Sterling’s value, things will start to slide quite rapidly in the second half of 2011. I remain sure that the Pound will be seen as a relatively safe bet from here on: but if that proves to be the case, then new export industries offering added value must begin sprouting – and fast. For the life of me, I cannot see convincing evidence that this is happening.