March – Trade Outlook

The stage looks set for the UK to trigger Article 50 as planned by the end of March 2017. This will start the process of negotiating the UK’s way out of the European Union, a process which will be at best difficult. As no-one at this stage knows precisely what the trade arrangements will be after Brexit, and as these arrangements won’t come into place for at least eighteen months, it is a good idea to take a snapshot of where we are now in trade terms  and, indeed, to look at what the future looks like if nothing changes. At the very least, this provides a reference point for that point in the future when we are, well, where we will be.

Figure 1:          Projected annualized average growth of UK trade with global regions, 2016-2020
Source:            Equant Analytics 2017

NOTE:     The projected growth between 2016 and 2020 is based on a momentum forecast only. The momentum forecast is taken from all available data for the UK between 1996 and 2016 (inclusive) to capture cyclical changes in trade and from the last ten years and the last three years to create the forward momentum. The projections are based entirely on the data series and not on assumptions about policy changes or their impact. This note applies to Figures 2 and 3

At first glance the chart shows that although UK exports to the EU 27 and the EU currency area are projected to fall, export growth to the Asia Pacific region (APTA) may be as high as 7.4% annually to 2020. This is a pattern that has been gaining some momentum for the past few years, particularly since the investment of BMW in the UK, which has boosted car exports to China for example. Export trade to the Middle East and North Africa is also projected to grow and much of this is in aerospace and engineering-related supply chains. Trade with North America seems set on a downward path – clearly Theresa May’s recent visit to the US has yet to show through in the projections!

However, two key points about this chart need to be considered before a universally positive conclusion is drawn. First, generally speaking, imports look set to grow faster than exports. Some of this may simply be due to the weakness of sterling making imports more expensive but it does suggest that even on current conditions our exports are not growing fast enough to cater for increases in imports. Imports from the Asia-Pacific region (notably China) are the notable exception but as we export just over half to the Asia Pacific region compared to what we import ($46.6bn compared to $87.5bn) this explains why growth of imports might be slower.

Second, exports to Europe, both the EU27 and the Eurozone are set to decline and the increase in export trade with Asia Pacific, even on current trends, is insufficient to make up for this loss. We project exports to the EU27 to be worth $197.6bn by 2020 while exports to the Asia-Pacific region to be worth around $57.6bn, or just under 30% of the value of European exports by 2020.

The picture of UK trade by sector shows just how integrated into global supply chains our businesses are. For example, the top ten sectors (shown in Figure 2 from left to right by size), also show that generally imports are set to grow more quickly than exports. This may not in itself be a bad thing, because where imports are growing in components, for example, the UK is able to add value through its exports of cars. Certainly for pharmaceuticals the projected annual growth to 2020 of 2.8% is substantially higher than the annualized growth between 2010 and 2015 of 1.2%.

 

Figure 2:          Projected annualized growth for the UK’s top trade sectors, 2016-20 (%)
Source:            Equant Analytics, 2017

However, UK export growth is fragile, even on the basis of current conditions. Projected export growth to 2020 for computing is close to zero, while export growth for automotives is one third of the rate it was in the 2010-2015 period of 6.0%. Exports in electronics, organic chemicals and oil and gas look likely to decline. The obvious exceptions are gold and precious metals and works of art where exports will grow more quickly than imports.

Figure 3:          Projected annualized growth, 2016-2020, for key UK services (%)
Source:            Equant Analytics 2017

The UK runs a trade surplus in services and exports overall look set to grow faster than imports over the next five years. However, the picture is mixed. Travel, transport, intellectual property and insurance are the four service sectors where exports are growing particularly compared to imports but cultural and creative, franchising and licensing and financial services exports are likely to decline on current trends over the next five years. Financial services in particular is an iconic sector for the UK because of its links with employment and the regional economy of London and this negative outlook ahead of Brexit negotiations is important for policy makers to bear in mind.

What this overview shows is the fragility of UK trade generally and exports in particular. Trade is growing quickly with Asia, and some of our top sectors and services look strongly placed ahead of Brexit negotiations. However, the fact that imports are growing quickly has to be seen in a context of an area of globalization. If globalization is thrown into reverse during the course of the next two years, not just because of Brexit but also because of increased protectionism in the rest of the world, especially in the US, this position is increasingly untenable as we return to an era where export strength is equated with national economic strength. While nobody really knows what will happen, any uncertainty will increase the downside risks in the current outlook.