Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Services take the largest share in the UK's economy and its exports. That is why the widening trade deficit is a bit of a puzzle. Services are not tied to supply chains, in principle there is no need to increase expenses and pass costs on the the client in face of currency devaluation.

Since it is exactly the opposite happening, I wonder if the Services sector has already tied its costs (mostly wages) to other currencies.


by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Tue Aug 22nd, 2017 at 03:15:41 PM EST
[ Parent ]
I wonder if the fallacy here is to expect the balance of trade to respond too quickly to changes in the exchange rate. I'm no expert in this area, but old habits die hard.  If you've always bought a particular brand of whatever you tend to continue buying it unless there is a really sudden, noticeable and major increase in price.

So if the UK is still buying/importing  more or less the same goods/service as it did a year ago - and paying up to 18% more for them - you would expect the balance of payments to actually worsen in the short and medium term.  Ditto with UK exports, if exporters aren't passing on cost reductions enabled by devaluation or if overseas buyers aren't buying any more of them even if they are cheaper.

In the longer term, of course, you would expect UK exports to increase and imports to reduce, in volume if not in value terms (expressed in Euro). But that also assumes that British exporters are geared up to ramp up production in response to increased demand. Given "goods" as opposed to services are such a small proportion of overall exports, the effect could be quite marginal on the economy as a whole. It will take a very long time before any increase in goods exports makes up for the loss of services exports to the EU when UK institutions lose their passporting rights.

So years from now, "economists" will still be wondering why the UK economy responded so little and so slowly to the devaluation stimulus - much as they wonder now at the continued absence of inflation. None seem to think the UK class structure, the lack of governmental fiscal stimulus or the destruction of Trade Union bargaining power has any role in all of this. Of course we know better!

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Aug 22nd, 2017 at 03:53:22 PM EST
[ Parent ]
I would argue that a 22 month long trend is not short term.

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Tue Aug 22nd, 2017 at 03:58:14 PM EST
[ Parent ]
the issue I see with that is that "balance of payments" is often represented by finished manufactured goods. Things that are bought for a solid price and whose value is accurately reflected within GNP.

Services, especially financial ones, have a much less mechanical relationship to GNP. The money never enters the UK financial sphere, is never taxed here, is never declared here. So, although financial services declare a fabulous value to the nation, the country only benefits from a shadow fraction of this value via wages (but rarely bonuses), and other land subsidies.

The UK is hevily represented in areas that provide no benefit, but has a hollowed out manufacturing base entirely unable to respond to increasingly favourable international trading circumstances

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Tue Aug 22nd, 2017 at 05:12:34 PM EST
[ Parent ]
The loss of spending from those employed in the current UK financial system will definitely be felt, just as the closing of a military base is felt. And the >10% of finance that does survive due to actual domestic demand will continue. This is not as bad as, say, the collapse of automobile manufacturing, which would leave the country totally dependent on imports for a basic good. What is important is how much can be made without need for much foreign exchange if the currency continues to be seriously devalued. It could well be that there are business people who were and are quite unhappy with the whole disinvestment parasitism of the financial sector and who will purchase on the cheap existing facilities where UK made goods could now again profitably be made and will start making them again. Ideally this would include new, high tech manufacturing processes such as are being developed around Oxbridge.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Aug 22nd, 2017 at 06:32:12 PM EST
[ Parent ]
As I recall, when we get into the weeds on national accounts, we have the balance of exports minus imports dealing mostly with real goods either raw materials or manufactured goods, and a similar export minus import balance for those services which there can be a direct accounting. But then there is the balance of direct foreign investment into and out of the country along with the flow of revenue streams from those investments. This latter bit is where much of the controversy about Apple, etc. has originated as, under current rules, it can be and has been grossly manipulated. That manipulation is a major part of the core 'competence' of Wall Street and The City.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 23rd, 2017 at 03:53:29 PM EST
[ Parent ]
UK gov't concern for EU cooperation partially reveals its understanding that further GBP devaluation undermines UK business' marketing EU imported G&S. More important, GBP devaluation may not "stimulate" comparatively weak EU demand for UK imports and teeny share of EU interstate trade.

Continuity in the availability of goods for the EU and the UK (pdf, 21 Aug 2017)

Why is this language careful not to compare EUR price to GBP value, UK legal tender? Because the avg. annual exchange rate 2016, GBP:EUR was 1:1.22. One pound bought EUR 1.22 in G&S; one EUR bought 0.89 pence of UK G&S. UK imp/exp firms, IBs, IT, "farmers" easily exploited the margin by buying any supply chain elements from anywhere with GBP, selling in EUR or GBP.

Context for a future relationship
In 2016, the EU exported  €127.9  billion of consumer goods  to the UK and imported €62.3 billion of UK consumer goods. 4 Producers in the rest of the EU rely on UK firms in their supply chains [DISTRIBUTION, RAW GOODS, INTERMEDIATE GOODS, FINISHED GOODS], and vice versa. In addition, the UK is an important contributor to many European value chains [DISTRIBUTION OF 'VALUE-ADDED' BY MECH. & HUMAN LABOR], and in 2011 the UK content accounted for 1.9 per cent of the total value of other EU member state exports, and 6.4 per cent of all foreign value-added [PROFIT MARGIN] in other EU member state exports. 5

Here, "services" is a euphemism for mechanical & human labor, together.

Principle D: Where the goods are supplied with services, there should be no restriction to the provision of these services that could undermine the agreement on goods
34. Goods and services trade flows have consistently moved in lockstep with each other. 11 Services are essential  for  production  of  goods, for their sale, distribution and  delivery, and  for  their operation and repair. For example,  EU  statistics suggest that in  2015 the EU imported €1.6 billion of maintenance and repair services from the UK, while exporting €2.2 billion. 12 As  our economies modernise and  grow, the link between goods and services is becoming ever more important ...

The pitch is to persuade EU27 to accept cost shifting (again) just in case GBP "breaks" the EUR.

Diversity is the key to economic and political evolution.

by Cat on Wed Aug 23rd, 2017 at 07:37:05 PM EST
[ Parent ]
2015 GBP:EUR avg. annual exchange margin was greater than 2016.
One pound bought EUR 1.38 of EU G&S.

Diversity is the key to economic and political evolution.
by Cat on Wed Aug 23rd, 2017 at 08:03:05 PM EST
[ Parent ]


Top Diaries

A Tale of two Budgets

by Frank Schnittger - Oct 3

Sweden falls to the Nazis

by IdiotSavant - Sep 15

Focus on Josep

by Oui - Sep 24

Occasional Series