27 July 2017
Originally published by Brexit Central.
For years now, the cognoscenti of UK economics have complained about the current account deficit and demanded rebalancing; I include in their ranks Nick Clegg, Sir Vince Cable and the CBI, to name a few.
But when it happens as a result of Brexit, they complain again. Now because it was horrible Brexit that caused it, it must all be bad. They bang on about the effect on consumption without referring to the effect on exports, orders, investment and profits.
It so happens we have just had for July the most bullish CBI Survey of UK manufacturing that I can remember. For example, the volume of output is the highest since January 1999, and total order books are the highest since October 1988. The CBI modestly entitles this July survey: “Output growth accelerates to two-decade high”.
And yet, and yet. Have we seen any headlines about it on the BBC, or in the Guardian or the FT, or has the CBI itself drawn attention to it? Have we heard from Carolyn Fairbairn that the manufacturing economy is set fair? No, I don’t think so.
Instead these people are mourning the weak first quarter GDP figures and the slowish second quarter ones just out; 0.3% after the 0.2% for the first quarter, revised down from the preliminary 0.3% estimate.
Yet this slowness is of course due to the effect on consumption of the ‘pass through’ of the devaluation into the Consumer Price Index and its effect on real wages and private consumption. This is all straight out of the basic playbook of devaluation: devaluation works to rebalance the economy towards a reduced current account deficit, more net exports, stronger manufacturing profits and more investment – precisely by reducing personal real incomes and consumption and pushing money instead towards producers of traded goods and services.
It is also a well-known feature of this process that there are varying lags in its operation. It tends to work faster on consumer prices and incomes than it does on producers’ net exports and investment. It may even worsen the current balance in the short run because the prices of imports go up rapidly with devaluation, whereas export prices may remain set in sterling terms to pass the benefit of devaluation on to foreign buyers, to increase sales volume.
Another well-known feature of these events is that different parts of GDP get surveyed with differential precision in the short run. This is why GDP figures keep on being revised years after the event, as new data is gathered that better samples what was happening. Retail sales and consumer spending is probably most reliably sampled in the short term, apart from in bad recessions when sales go into new outlets promising better value to the harassed consumer. But output and export figures of companies get sampled poorly especially when there are changes in composition or new markets involved.
So deep is the hatred of Brexit among our cognoscenti that they will stoop to any piece of data to suit their book and deliberately ignore the underlying picture.
Yet the data will out and this CBI survey is a harbinger of what is to come. Already the Purchasing Managers’ Surveys – of manufacturing, services and construction – are all confirming that steady growth is continuing; they are all around the 54 mark for June/July, where 50 and above means growth.
Then the latest ONS trade figures for May, excluding oil and erratics, show export goods volume growth since June last year of 10.5%. This compares with a healthy consumption-fed growth of 6.5% for import goods volume growth. This is a 4% swing on the goods volume balance since the referendum and exactly what one would be looking for after the Brexit devaluation.
Now we have the CBI Survey for July where manufacturing is shown as going gangbusters, with strong investment intentions, export orders and so on.
When one considers the implications of all this for the UK growth forecast over 2017 and 2018, it is promising growth in the range of 2-3%. One must remember that GDP figures are indeed constantly revised and one simply must not get fixated on the latest quarterly estimates; remember too that even that ‘weak’ first half of this year has shown nearly 2% growth on the same half of 2016.
We are now embarked on a largescale regime change with Brexit. First, we are seeing the effects of the highly stimulative Brexit devaluation helping to reshape the economy towards trade and away from consumption. Second, we will be seeing the effects via anticipations of the redirecting of our trade towards the wider world with our EU trade consolidating rather than growing. Third, we will start to see in the longer term the effects of lower prices of traded goods from that wider world showing up in the CPI and starting to create more competition in the farming and manufacturing sectors; these sectors will also need to rely less on cheap taxpayer-subsidised unskilled labour. Out of all this we should see faster productivity growth and better real wage growth as 2019 comes into view.
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