A difficult rebalancing act - Economics weekly


A difficult rebalancing act - Economics weekly

Four years ago, in the teeth of the recession, policymakers called for a great British rebalancing act.

Economic Analysis

02 April 2013

Financial services would play a smaller role in our economy, as would consumer spending. Instead we would refocus on manufacturing and exports. How are we doing against this plan? Financial services are smaller and consumer spending is lower than before the crisis. But plenty isn't working as was thought. Services output is doing better than industrial production and our exports aren’t taking advantage of growing world trade, or a weaker currency. Rebalancing, it seems, is easier in theory than in practice.

It's played four, lost three for the UK economy in 2012

The UK economy managed to grow by 0.3% in 2012. But it was a struggle. In quarterly terms, it was played four, lost three, as output only grew in the third quarter, largely thanks to the Olympics, which flattered an otherwise lacklustre performance. The squeeze on households continues: more of us are working, but for less once inflation is taken into account. Companies too are feeling the pinch. Gross operating surplus (profits) fell by 4.3% in the final quarter, the sharpest fall since 2010. Ouch.

Service sector ploughing on

The service sector, which accounts for three quarters of the UK economy, grew 0.8% over the past 12 months, with consultancy services a strong performer. While not spectacular this continues the slow-but-steady growth we have seen in this sector. Indeed services have now recovered all of the ground lost during the recession of 2008, whilst UK GDP remains 3% below pre-crisis highs. Rebalancing towards other sectors seems to have ground to a halt.

UK’s trade underperforms...

The UK’s export performance has been disappointing. This is a theme I've commented on frequently, especially since net trade wiped almost 1% off GDP growth last year. The most recent figures show UK exports are 2% lower than they were a year ago (using the more stable 3-month averages). But at the same time world trade has risen by almost 2%. Unfortunately our major trading partners haven’t been driving that growth; instead it has been Asia’s emerging economies.

…as does its overseas investments

No-one likes the fact that we buy more from other countries than we manage to sell, but there has always been some comfort from the knowledge that this was offset by the income we earn on our investments overseas. The UK is a very active investor abroad and for the last twelve years has consistently earned more income on its investments abroad than it had to pay out to foreign investors.

That almost came to an end last year when 2011's £26bn surplus dropped to just £1.6bn. Taking away this support plunged our overall current account deficit to 3.7% of GDP for 2012, more than any year since 1989. Here's hoping our investments are more profitable in 2013.

Gilt yields continue to plunge

A few short weeks ago, the yield on 10-year government bond yields was sitting at a 12-month high of 2.2%, as investors started to question the UK's "safe haven" status. How things have changed. An inconclusive Italian election and the Cypriot banking crisis have boosted the popularity of gilts. Yields have fallen by half a percentage point, to 1.7%.

The cost of borrowing has fallen for large corporates as well; the benchmark yield on AAA bonds has fallen to an all-time low of 3.0% (10-15 year). Corporate bond issuance may have had a wobble in January but if yields fall below 3%, as looks likely, then 2013 will be another strong year for this form of finance.

Bank regulator presses for capital to be raised faster

Members of the Bank of England's Financial Policy Committee (FPC), have been making speeches on banks' capital levels for the last two years. Last week the discussions and debate came to an end. The regulator found that the banks were deficient in three areas: not provisioning enough against troubled loans; too optimistic on the cost of settling the PPI & Libor issues; and underestimating the risks of some assets.

The FPC estimates that UK banks need to raise £25bn to meet the desired capital ratio of 7% by the end of the year. But their current plans would close half that gap. The message is clear. Get safer, faster.

US housing recovery still on track, despite blip

Purchases of new houses in the US slipped by 4.6% m/m in February but this is likely no more than a hiccup in the recovery. Year-on-year, sales were up 12% and prices by 14%. It took builders five months to shift the houses they sold in February, down from 7.5 months a year earlier and a staggering 14 months at this time in 2010. That's a measure of the turnaround in US housing, as well as of how far it had fallen.

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