We have been hearing about the fact that the UK economy needs to 'rebalance' for years now. The theory follows that the economy needs to move away from imports to exports, from services to manufacturing, from being a nation of shopkeepers to being a nation of inventors. This will, so the argument goes, counteract the falling consumer demand and take advantage of growth elsewhere.
It's that last part of that outcome that has been the stumbling block for not just the UK, but other nations who've gone down a similar route in the past.
It's been widely acknowledged that the difference between this global economic dip and the one in 2009/10 is that, this time, the emerging market economies are also wobbling. The BRICs (Brazil, Russia, India and China) are no longer looking so sturdy, hence the IMF's recent downgrade of global growth to 3.5% through 2012. These emerging market economies are happy to blame these falls in output on the Eurozone, as is everyone, but there are other forces at play.
These economies have gone through a decade of tremendous expansion and while export figures are lower, their own economies are being rebalanced in the opposite direction. China's manufacturing class will not take over from the US as the world's most important consumer base for at least 50 years, but the seeds of transformation are being sown at the moment. There is no way that a country can sustain a growth rate of 8% as consumption increases and so growth must begin to slip.
Recent figures from the ONS suggest that UK business has already taken notice of this with our exporters shifting their focus from the Eurozone to these emerging market economies. Some strong ties already exist from the days of Empire, but sentimentality holds no place in international trade and these UK companies will be working hard to find more and more buyers for their wares.
The EU still remains an important market obviously although the most recent data suggests that the UK is now exporting more extra-EU for the first time since the beginnings of the common market in the 70s. UK businesses benefited from geographical ties in the good times and now must weather the effects of those ties during this leaner period.
Unfortunately the pound has not offered very much assistance in recent months. Since the beginning of the year, GBP is 7.9% stronger against the Brazilian real, 5% stronger against the Indian rupee, 1.4% stronger against the Chinese yuan and 1.2% stronger versus the Russian ruble. Sterling has benefitted from being a slight 'haven' asset (somewhere where investors put money when sentiment is negative) and with all that has been going on in Europe, it has been in demand since the turn of the year.
Everything in the currency markets hangs on one thing at the moment; the role of the Fed through the 2nd half of the year. Should the Fed feel the need to initiate another round of asset purchases then we should see riskier currencies gain, as hot money flies into these areas in order to take advantage of high yields. GBP does not stand to benefit from this and so, further joy for exporters could be a possibility later in the year.
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