CEO Blog: World trade set to grow by over 5% this year

World trade is expected to grow by over 5% in 2018 providing a strong stimulus to UK exports in goods and services. The world economy is set to grow by almost 4% this year and next, as strong growth in the USA, China, and Japan is supported by the recovery in Europe.

In the UK, we expect GDP growth to average around 1.8% this year and next. Inflation may hover around 3% in the short term but will end the year around 2.5%. The Bank of England expects inflation, CPI basis, to return to target within the two year period but then it always does. The 2% level may prove elusive as world inflation increases and pay levels rise in the UK.

The Bank of England decided this week to keep rates on hold. The MPC voted unanimously to maintain the level of base rates at 0.5% and to maintain central bank holdings of government and corporate bonds at current levels.

The Governor warned rates may rise “earlier and to a somewhat greater extent”

“The MPC judges that, were the economy to evolve broadly in line with its February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent than it anticipated at the time of the November Report. All members agree that any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent.”

“Earlier and to a somewhat greater extent but at a gradual pace and to a limited extent.” Confused? Markets think the next rate rise could be in May. Expect a 25 basis point rise at least every six months, until the level hits 2%. It could be even faster one suspects.

Re-balancing of economy

The bank expects a re-balancing of the economy towards net trade and investment away from household spending. Wages are expected to pick up as employment trends remain strong, unemployment hovers around 4.3% and recruitment difficulties increase. The unemployment level of 1.4 million contrasts with 800,000 vacancies within the economy on the last count.

Government borrowing is expected to fall in the current financial year to a level or around £42 billion and could be eliminated within a three year period if the clamp on spending persists.

Austerity is out of fashion in the USA. The era of largesse begins with tax cuts and spending plans boosting Uncle Sam’s borrowing to around $1 trillion dollars this year. Trump economics will boost US growth and world trade as the twin deficits expand.

UK growth expectancy vs. Rest of world

The uptick in world trade will contribute to the net UK trade performance, or so it is hoped. Relative rates of growth are a key factor in determining trade patterns. Growth of around 2% in the UK will contrast starkly with world trade growth of 5%. Strong growth in China and India, faster growth in North America and Europe will assist the process. With the exception of Venezuela, few of the economies under watch will exhibit negative growth.

The UK should benefit from some export rally in manufacturing, especially in capital goods for overseas markets. “The march of the makers, is now rebuilding the workshop of the world in overseas lands”. Our caveat remains, capacity is constrained and exports have a large import propensity”.

In 2017, the deficit on goods increased from £135.5 billion to £138 billion. It will rise further this year. The good news, the service sector surplus increased in the year from £95 billion to £104 billion. The overall trade in goods and services fell to £34 billion. We expect a further fall to around £30 billion this year.

Brexit’s effect on Sterling

Sterling rallied on hopes of a rate rise, then fell on news of intransigence on talks with Europe. The Davis – Barnier entente is cursed by some form of mutual schadenfreude. The pleasure derived from another’s misfortune, is alas at the expense of the British economy. Transition deal is no longer a given warns Barnier.

Businesses are now seriously concerned. They will execute contingency plans for a hard Brexit, in the absence of a deal. Relocation to within the EU borders of head office and manufacturing facilities will follow. Japan issued a stark warning to government this week about the risks Brexit poses to manufacturing in the UK. “If there is no profitability, then no private company can continue operations. It is as simple as that” said Ambassador Koji Tsuruoka. Japanese firms will be forced to relocate within the EU borders, the clear message.

In a poll by the Independent last week, 74% of those interviewed claimed they did not understand the government objectives in the negotiations about Brexit. One suspects the proportions in Cabinet are broadly similar if not higher. It really is time to clarify the ask if the modest growth targets in the UK are to be hit this year.

pro-manchester CEO, Dr. John Ashcroft updates his economics blog, The Saturday Economist on a weekly basis. Click here to follow his updates