UK Manufacturing Growth
Factory Output increased by 0.6% in September, beating forecasts of 0.4% and up on the 0.2% growth seen during August. Only in July, immediately post the Brexit result, did the figure fall (by 0.9%). Surveys also indicate a pick up in October with export orders in particular becoming stronger as a result of the weaker pound.
Despite boosting exports, an immediate impact of the fall in Sterling has been a deterioration in the trade balance with the UK importing more than it is exporting to the tune of £28.7bn during the third quarter, a 6.2% deterioration from the position in the first three months of the year. However, in some respects this reflects a time delay with customers committed to orders agreed when Sterling was higher and as time goes on this effect should wane.
Graph 1: UK Index of Manufacturing
Source: Office for National Statistics, 2016
It is also interesting that Germany reported its fastest fall in industrial output in September with output down 1.8%. This is likely to reflect, in part, the fall in demand from UK consumers but also the fact that British suppliers may be taking business from their German counterparts. It does underline how inter connected the UK and EU are as a trading block and will hopefully act as a positive influence in ongoing Brexit negotiations.
Theresa May ‘Golden Era’ for UK-Chinese Relations
This week UK Chancellor Phillip Hammond met with China’s vice-premier, Ma Kai, for economic and financial discussions. UK Prime Minister Theresa May is hoping to achieve a strong relationship with China from the meetings saying “I’m determined that as we leave the European Union, we build a truly global Britain that is open for business. As we take the next step in this golden era of relations between the UK and China, I am excited about the opportunities for expanding trade and investment between our two countries”. Hammond added “China is the world’s second-largest economy. UK exports to China have grown rapidly and Britain is home to more Chinese investment than any other European country”.
Forecasts of an immediate fall in financial markets following the election of Donald Trump as the 45th President of the United States fell wide of the mark with markets around the world recovering from early weakness to close up and the Dow Jones Index hitting an all time high in the wake of the result.
With confirmation that Trump is the new President we thought we would take a look at key US trade positions because Trump has indicated that change is needed. America is indeed running large deficits with Mexico ($5.2bn), Canada ($1.1bn), and China ($32.5bn). Recent activity around trade negotiations has shown that it is an increasingly protracted process to get ‘free trade’ agreements implemented because of strong vested interests. This was highlighted most recently when Wallonia, a small regional government in Belgium, held up an agreement between the whole of Europe and Canada.
So, if Trump is looking to make an immediate impact and help redress trade imbalances working against the US, it is evident that he can do so through trade tariffs and this is something that will be interesting to monitor closely. It will have an effect on currencies and prices of goods and may have negative repercussions for those countries exporting to the US. If Trump is proved right it will be good for US job creation and will force countries like China to escalate the rebalancing of their own economy toward domestic consumption and a greater service component.
What his tenure will ultimately mean for the US economy is still unclear. However, his pledge to cut both corporate and personal taxation and to introduce an extensive programme of spending on America’s infrastructure has been welcomed. Commodity prices have risen as a result and, despite some concerns of what such a stimulus might mean for future inflation and interest rates, markets have reacted favourably.