Forex Outlook

The developed nations have lately got away with throwing vast amounts of Quantitative Easing money into the system only because the results have not yet come home to roost;  but once more other people are paying the price…

Powered by article titled “Quantitative easing and common sense” was written by Letters, for The Guardian on Wednesday 7th October 2015 18.34 UTC

Zoe Williams (It’s fine to print money, so long as it’s not for the people, 5 October) raises an important question about quantitative easing (QE). In the wake of the global financial crisis, it was adopted by the Bank of England. Capital markets had ceased to function. The banking system was in deep crisis. In the US and Britain, governments were driven to inject equity into the collapsing banking system. These huge outlays had to be funded by the issuance of public debt. The Bank made clear to the prime brokers (mainly the major commercial banks) that they would be offered access to zero-cost funds in order to bid in Treasury auctions. These funds were provided electronically by the Bank into the accounts of those banks held with it.

These no-cost credits enabled the prime brokers to purchase the government debt, and by agreement swap back the debt to the Bank at a modest profit. Once this happened, the electronic advances made by the Bank were cancelled. The net effect was threefold. First, the government’s solvency was preserved. Second, the prime brokers were able to secure profit from guaranteed transactions to replace more traditional forms of lending. Third – the odd bit – the Bank ultimately ended up holding the debt of the British government, not the private sector of the economy.

This reveals the “efficient secret” of central banking. The Bank is effectively financing the state through the indirect purchase of government debt. Zoe Williams asks the question: why can’t this “mechanism” be used to finance other major projects? The answer is that it could. QE involves little or no monetary expansion. It has no inflationary consequences. But these matters are not widely understood. Time for a reasoned debate on the merits of its wider use in these most unusual times.
Richard Tudway
Centre for International Economics

• Zoe Williams says “all money is created from nowhere”. She is talking through her hat. The basis of money, which is gold or, in some cases, other commodities (mainly metals) is as founded in the real world as any other product. To find, mine, refine and distribute gold requires vast amounts of human labour, which is why it is valuable – all value coming from the labour embedded in something.

Paper money and credit is simply a claim on real money, a paper or electronic token which saves carrying around bags of gold and it runs back to real money eventually. Issuing more tokens than there is gold is a large part of credit and banking, relying on everyone not turning up at the same time to claim it. It has a place and helps the world economy spin round, but detach it too far from real value (print too much) and it starts to create problems – like raging inflation, bank defaults etc.

When Richard Nixon took the dollar off the gold standard, the US was effectively bankrupt, surviving only by devaluing its debts and reneging on the agreed price for its imports. It has continued doing so ever since. Someone pays the price, and that is the developing world mainly. And eventually it collapses anyway, like it did in 2008.

The capitalist world has lately got away with throwing vast amounts of QE into the system only because the results have not yet come home to roost; but once more other people are paying, such as the Greek workers, the Middle East and, above all, China soaking up the paper money.

It cannot go on much longer. Even the Guardian routinely points out the imminence of further crisis. So, no, more of the same, however it is directed, solves nothing.
Don Hoskins
Economic and Philosophic Science Review

• How refreshing to read some common sense on macroeconomic policy. As long ago as 1948, Dudley Dillard (The Economics of John Maynard Keynes) was saying similar things: “Is there any necessity for subsidising the commercial banks by paying them huge amounts of interest to create the new money which is required for economic expansion? Is not the creation of new money properly a government function?” He clearly advocates “people’s QE”, though it is not called that. To the extent that there are underemployed resources and supply is responsive, it should not be inflationary.
John Levi
(Retired economics lecturer), Abingdon, Oxfordshire

• Zoe Williams’ article about printing money which does not grow on trees reminds me of an incident that took place in my university days. On a family visit to Cambridge, I had seen some rather expensive books which would help my studies. Over a cup of tea, I asked my father (a fruit grower, who specialised in apples) if he would kindly buy them for me. He replied that he had no money. “You must have,” I said. “You have just sold a whole cold store of apples.” He indignantly exclaimed: “Apples don’t grow on trees, you know.” I got my books.
Gillian Caddick
Peterborough, Cambridgeshire © Guardian News & Media Limited 2010

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Finance institute forecasts net capital outflow from emerging markets for first time since 1988 leaving states vulnerable to capital drought. The IIF’s analysts say the current reversal is the latest wave of a homegrown downturn…

Powered by article titled “Global investors brace for China crash, says IIF” was written by Heather Stewart, for on Thursday 1st October 2015 18.34 UTC

Global investors will suck capital out of emerging economies this year for the first time since 1988, as they brace themselves for a Chinese crash, according to the Institute of International Finance.

Capital flooded into promising emerging economies in the years that followed the global financial crisis of 2008-09, as investors bet that rapid expansion in countries such as Turkey and Brazil could help to offset stodgy growth in the debt-burdened US, Europe and Japan.

But with domestic investors in these and other emerging markets squirrelling their money overseas, at the same time as international investors calculate the costs of a sharp downturn in Chinese growth, the IIF, which represents the world’s financial industry, said: “We now expect that net capital flows to emerging markets in 2015 will be negative for the first time since 1988.”

capital flows to emerging markets set to turn negative

Capital flows to emerging markets look set to turn negative. Photograph: IIF

Unlike in 2008-09, when capital flows to emerging markets plunged abruptly as a result of the US sub-prime mortgage crisis, the IIF’s analysts say the current reversal is the latest wave of a homegrown downturn.

“This year’s slowdown represents a marked intensification of trends that have been underway since 2012, making the current episode feel more like a lengthening drought rather than a crisis event,” it says, in its latest monthly report on capital flows.

The IIF expects “only a moderate rebound” in 2016, as expectations for growth in emerging economies remain weak.

Mohamed El-Erian, economic advisor to Allianz, responding to the data, described emerging markets as “completely unhinged”, and warned that US growth may not be enough to rescue the global economy. “It’s not that powerful to pull everybody out,” he told CNBC.

Capital flight from China, where the prospects for growth have deteriorated sharply in recent months, and the authorities’ botched handling of the stock market crash in August undermined confidence in economic management, has been the main driver of the turnaround.

“The slump in private capital inflows is most dramatic for China,” the institute says. “Slowing growth due to excess industrial capacity, correction in the property sector and export weakness, together with monetary easing and the stock market bust have discouraged inflows.”

At the same time, domestic Chinese firms have been cutting back on their borrowing overseas, fearing that they may find themselves exposed if the yuan continues to depreciate, making it harder to repay foreign currency loans.

The IIF’s analysis shows that portfolio flows – sales of emerging market stocks and bonds – have been more important than the reversal of foreign direct investment (for example, multinationals closing down plants or business projects) in the recent shift.

It warns that several countries are likely to find their economies particularly vulnerable to this capital drought.

“Countries most in jeopardy from emerging-market turbulence include those with large current account deficits, questionable macro-policy frameworks, large corporate foreign exchange liabilities, and acute political uncertainties. Brazil and Turkey combine these features.

This warning echoed a one from the International Monetary Fund last week, that rising US interest rates could unleash a new financial crisis, as firms in emerging economies find themselves unable to service their debts. © Guardian News & Media Limited 2010

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October 22, 2014 – (ATFX Currency Management) – With the Fed’s October 28-29 meeting right around the corner, we examine the prospects for an end of the U.S. central bank’s Quantitative Easing program and its potential impact on the U.S. dollar.

Here is the FOMC meeting outlook from the research team at ATFX Currency Management.

All you have to do is look at futures bets to gauge where the market feels the Fed is at this point. Bets on a Fed rate hike in October 2015 currently stand at 49 percent, down from 85 percent at the end of September.

Although the Fed’s outlook will be cautious, given the global economic slowdown, there is no reason for the U.S. central bank to stop tapering at this point.

So, the Fed will most likely announce the end of QE altogether with a final $15 billion reduction in the monthly asset purchases, while at the same time stating its usual promise to keep rates near zero for a “considerable time”.

The odds of a dovish Fed are high, but the USD could still get a boost from the end of QE.

August 29, 2014 (ATFX Currency Management) – The September meetings of the European Central Bank and the Bank of England, coupled with the U.S. Nonfarm Payrolls report will take the center stage in the week ahead. Here is what to expect and the outlook from the strategy team at ATFX Currency Management.


We now know that there were two MPC members at the Bank of England who voted for a rate hike in August and they will probably cast the same vote in September. Of course, the majority of the nine MPC members are still not in a hurry to raise rates, but if the two “hawks” are joined by one or two more, the market will begin to price expectations of a shift in the policy makers’ views which could lead to a rate hike in the early part of next year. Naturally, such expectations should be supportive of the GBP. However, we will probably not see significant GBP strength until the Scottish independence vote on September 18 is behind us. Provided that the vote is not a “yes” (which will really complicate things for the U.K. and its currency) the GBP would be able to clear a major obstacle to its future appreciation.


The drop in eurozone inflation and the stagnation of the economy in Q2 have increased the odds of more easing by the European Central Bank. The ECB President Draghi has also been very clear in recent speeches that the door is wide open to easing monetary policy further. In fact the ECB has announced recently that it is looking to hire consultants to advise the central bank on QE strategies. With the ECB one step closer to launching a QE program, the divergence in the monetary policies between the ECB and other central banks is becoming bigger and even more visible, which should keep the EUR under pressure.


We expect the U.S. economy to deliver another, seventh consecutive month of job creation above 200k. Our forecast is for up to 230K new jobs in August from 209k in July, while the unemployment rate inches lower to 6.1% from 6.2%. Another positive nonfarm payrolls report should keep the Fed on track with the pace of tapering, leading to the eventual end of its QE program by the end of 2014. The USD will be likely to continue to attract bids with the trend accelerating when we get within a 6-month range from the Fed’s first rate hike.

ATFX is an alternative investment manager specializing in currency investment strategies and portfolio diversification through exposure in the FX market. The firm is registered as a Commodity Trading Advisor and is an approved member of the National Futures Association (ID# 0466436). Clients are individuals and institutions, including pension funds, charities, foundations, endowments, as well as corporations and family offices. For more information, visit

August 3, 2014 ( – On August 16, 2014, ShowFx Asia invites everyone with a shared interest in the FOREX and financial markets to Marina Bay Sands for its annual Conference in Singapore.

The Conference aims to hone the skills of traders of all proficiency levels and to unite in one place all members of the Forex community: brokers, dealing desks, trading experts and of course, individual traders.

Why the Conference is worth attending

As the Forex community in Singapore and Asia is growing, there’s quite a wide range of trading seminars and workshops taking place in the area. However, this show is one of a kind as the organizers have managed to engage a great panel of speakers to provide education and trading advice based on years of their experience. At the Conference traders will:

- learn how to recognize and neutralize trading mind traps

- discover the most practical and time-saving strategies

- get tips on building a trading plan

- meet face to face with top Forex experts

- get trading bonuses from Forex brokers

- enjoy raffles and prize draws

Forex experts

Stuart McPhee, OANDA (Keynote speaker)

OANDA’s Senior Currency Technical Analyst Stuart McPhee is the author of several bestselling trading books, most recently the fourth edition of his popular book “Trading in a Nutshell”. Stuart will focus on a set of trading rules which, compiled together, make for a profitable trading, as well as on the processes one has to go through to form his trading strategy.

Bert Antonik, Online Trading Academy

Toh Shun Gui, Forex Asia Academy

Arief Makmur, InstaForex

Hairul Azman Bin Mohammed, InstaForex

The organizers carefully selected speakers to maximize value for every attendee. Most seminars will provide detailed analysis of real strategies sifting out important information applicable to currency trading, as well as to the stocks and commodities markets.

Free Forex education 

ShowFx Asia believe that Forex education should be available to everyone, that’s why the entrance to the Conference is FREE! To RSVP, click here.

Traditional prize draws and raffles are planned for all conference visitors.


First, it was unexpectedly low growth of only 0.1% q/a, then the numbers were revised down to show the U.S. economy contracting. Some economists claim the drop in the U.S. Q1 GDP is a minor blip, but it’s not altogether clear how the U.S. will bounce back…


Powered by article titled “The US GDP puzzle: is this a temporary drop or something more serious?” was written by Heidi Moore, for on Thursday 29th May 2014 18.13 UTC

Is the US economy on the cusp of great growth? Or is it being pulled back into a morass of recession?

That debate has been reignited today as it was revealed that the US economy, which is supposed to be growing more robust, actually contracted in the first three months of the year, according to the Commerce Department. The sharp pullback – which would equal a 1% loss to economic power if extrapolated over the year – is the first major economic contraction since 2011. Another measure, gross domestic income, also fell sharply after years of growth.

The clearest reaction that sums it all up came from Pantheon Macroeconomics founder Ian Shepherdson in a note to clients on Thursday: “Ouch”.

The discussion is a weighty one. GDP, a measure number-crunched by the Commerce Department every three months, is the economic data point that policymakers most trust to gauge the health of the US economy. It takes into account everything from goods bought and sold to business investment to trade and export.

It’s also a political football. The growth of the economy could prove an influential data point in the midterm US elections this fall, in which the White House will want to show the economy is improving in order to win more seats for Democrats. Many Democrats and partisan economists, including Paul Krugman, have argued that the batch of austerity measures passed over the past three years by the US Congress would hurt economic growth.

As a result, a scrum of economists and pundits tried to make sense of the sharp, unexpected drop in growth, offering competing narratives around what it means. Many economic experts waved away the fall in GDP away as an anomaly, but did not offer much in the way of explanation about where future growth would come from.

The most popular conclusion among economists writing on Thursday was that GDP was hit by a short-term decline in inventories stocked by businesses during the first three months of the year. Inventories rose by only $49bn in the first quarter, not $87.4bn as previously thought, when GDP numbers were first announced in early May.

Yet inventories aren’t a completely neat explanation. The Federal Reserve, analyzing the numbers last month, attributed the decline to a decrease in net exports and the effect of bad winter weather, both of which may have also played a part. Enemies of austerity may also note that local government spending also dropped, contributing to that lower economic growth number.

In fact, many experts saw the drop in GDP as a good sign – interpreting it as proof that the economy is cleaning out all the dross before bouncing back, bigger than ever, in just a few months.

“First-quarter real GDP growth was revised downward,” wrote Doug Handler, chief economist of IHS Global Insight. “However, the nature of the revisions helps build the economic case for much stronger growth in the second quarter and through the remainder of the year.”

Others took it further. Goldman Sachs economists predicted in an outlook on May 9 that the economy would grow at a whopping 3.5% in the second half of the year, due to more consumer spending, greater housing growth, more industrial activity, and a bigger labor market.

That remains to be seen. For the time being, the fall in GDP was sufficiently surprising that some economists did not seem to believe their own eyes. Deutsche Bank’s economics team argued that the statistics will be revised twice more, on June 25 and July 30, and that the result may show better news for the economy. They seemed to see the GDP numbers as a contradiction to an overall trend in growth:

“A Q1 decline in real GDP does not jibe with some key metrics of the economy. Case in point, nonfarm payrolls expanded by +190k per month in Q1. At the same time, the ISM manufacturing survey averaged just under 53, and both retail sales (+1.0%) and manufacturing industrial production (+2.1%) eked out annualized gains in the quarter. ”

Yet others don’t seem so confident that the shoddy showing in GDP is easily dismissed. Former Federal Reserve chairman Ben Bernanke has been giving speeches telling hedge-fund managers to expect lower GDP for some time to come.

The broad-based recovery that many had hoped for has no doubt taken a hit in recent months.

For instance, inventories are only one element of GDP. Other elements of GDP that measure business confidence are only “less worse” in the words of Lindsey Group chief marketing analyst Peter Boockvar. For instance, fixed investment, which measures business spending on real estate and equipment, fell only 2.3% compared to a more recent fall of 2.8% – an improvement, but still overall, dropping.

Another aspect of economic health, housing, has also been showing weak growth, with some Fed officials “caught off guard” by the turnaround. Janet Yellen, the chair of the Fed, suggested to Congress in early May that negative housing growth could hurt the economic recovery.

And the employment picture, while apparently improving with lower jobless rates, is still very weak. The majority of jobs growth has been in low-paying part-time jobs, and over 10 million people are still out of work. In addition, labor force participation – which measures what percentage of Americans are working – has been at levels not seen since the stagnant economy of the 1970s.

In addition, it seems US households just have less to spend.

“The median annual income is 7.5% lower (about $4,309) than its interim high in January 2008,” said Sentier Research.

Many still argue for growth up ahead. But, with incomes down, housing suffering, and businesses still wary of hiring, it’s not clear where that growth will come from. © Guardian News & Media Limited 2010

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April 28, 2014 (ShowFX Asia) – It is no secret that trading has been gaining more and more popularity over the years, providing opportunities to generate income to anyone with analytical mind and ambition. 20 years ago, only large banks and corporations participated in the Forex market. Today daily Forex turnover is measured in billions of dollars. Countless brokers offer their services to newcomers all around the world.

As practice shows, although there are many forex investors, few are truly successful ones. It often takes months or even years to master your trade to the degree that would allow for stable income. Reading professional literature together with constant self-education and practice are indispensable steps on the way to success.

If you want to gain more knowledge of how the markets work and ask advice of renowned experts, financial exhibitions and conferences might be a good solution.

For instance, one of the well-established exhibition brands ShowFx World every year welcomes all those interested in trading at its numerous events all around the world. The company aims to increase professionalism of traders providing them with all necessary instruments, engaging a great number of speakers, participants, partners and guests. Forex and stock brokers, dealing centres, investment companies and financial experts are all gathered under one roof for you.

If Forex still sounds unfamiliar to you, it is worth attending at least one event in order to grasp the idea of what it is all about. Availability of financial trade to anyone nowadays regardless of occupation or education makes it more attractive than ever.

If you are an active trader, apparently there is nothing more valuable to you than information that might help you to make more profitable deals on the market. ShowFx World organizers thoroughly select speakers for each exhibition and conference. Previous events featured such worldwide gurus as Bert Antonik, Ray Barros, Dave Landry, Steve Ward and Gavin Holmes. All presentations are based on in-depth knowledge about financial markets, effective strategies and specific ideas for profiting in trade.

Comfortable and friendly environment serves as a great tool for communication at forex events. Experienced traders and analysts are free to answer all your questions and give advice, while traditional giveaways and prize draws among guests add a drop of entertainment to the show.

The nearest ShowFx World Conference in Asia will take place at Marina Bay Sands, Singapore on August 16, 2014. Follow the company’s website (  for updates.

Consumer spending in the United States lessened because of cold, snow and storms during the winter months according to the Federal Reserve’s ‘beige book’ report. But was the cold weather the only factor to blame for the weak economic data?


Powered by article titled “US economy hampered by severe winter weather, Federal Reserve says” was written by Dominic Rushe in New York, for on Wednesday 5th March 2014 20.32 UTC

As parts of America are experiencing their worst winter in 30 years, the severe weather has taken its toll on the US’s economic recovery, the Federal Reserve said Wednesday.

While cold weather and snow gripped much of the country in January and February, consumer spending was hit across the US, according to the Fed’s latest “beige book” report on the state of the economy; manufacturing and construction were also adversely affected. Weather was also cited as a contributing factor to softer auto sales in many areas. While the unseasonable cold did the most damage in agriculture, California’s record drought has also taken its toll on the state’s economy.

The Fed said hiring had notably softened in regions of the country hit by the severe cold. But the rate at which temporary hires were being converted into permanent hires picked up, and the underlying recovery appeared to be continuing. “Many districts continued to note shortages for particular types of specialized, technical skilled labor, such as healthcare professionals and information technology workers. Atlanta and Dallas also noted shortages for freight truck drivers,” said the Fed.

In total, the report mentions “weather” 119 times and “winter” 54 times, calling it extreme, harsh and severe. “Severe” appears 35 times in the report, “cold’ 31 times, “snow” 24 times, and “storm” 15 times.

The report comes before Friday’s monthly snapshot of the US jobs market. The non-farm payroll report, one of the most influential in the economic calendar, will be especially closely watched this month as it follows two disappointing reports. The US added an average of 205,000 per month in the year to November 2013, but December’s reading was only 75,000 and January’s 113,000. Economists polled by Thomson Reuters are expecting the US to have added 150,000 new jobs in February.

The severe winter has especially affected air travel. From December 1 through February 28, 108,600 flights were canceled, almost double the average of previous winters of 57,600, according to a poll by data tracker MasFlight.

Fed chair Janet Yellen told Congress last week that it was too soon to calculate the long-term impact of the extreme weather on the US economy.

The Fed is currently paring back its massive bond-buying economic stimulus program, known as quantitative easing (QE). Currently the Fed is pumping $65bn a month into the economy via QE, but is expected to cut that by $10bn at its next meeting unless the weather proves to have had a serious impact on the recovery.

“That recent weather impacted activity across the country should be no surprise. Numerous reports have suggested weather disrupted housing and manufacturing among other things,” Dan Greenhaus, chief strategist at broker BTIG said in a note to clients. “Simply put, the Fed’s beige book indicates that weather affected nearly the entire economy across the country this winter.” © Guardian News & Media Limited 2010

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Forecast for U.K. economic growth of 1.9% this year raised to 2.4% with IMF chief Christine Lagarde declaring ‘optimism is in the air’. IMF may also upgrade its outlook for the global economy, which in October it predicted as expanding by 3.6% this year…


Powered by article titled “IMF upgrades UK economic growth forecasts as global economy expands” was written by Katie Allen, for on Monday 20th January 2014 12.14 UTC

The International Monetary Fund is widely expected to raise its outlook for the UK this week, nudging up the country’s growth forecasts by more than for any other major economy.

The Washington-based fund is due to unveil an update on Tuesday to its World Economic Outlook from last October. Back then it forecast UK national output would rise 1.9% in 2014. Now it is expected to predict growth of 2.4%, according to a Sky News report.

The IMF is also expected to upgrade its outlook for the global economy, which in October it predicted as expanding by 3.6% this year. That would reflect the cautiously optimistic tone in a New Year’s speech from its managing director, Christine Lagarde, last week.

“This crisis still lingers. Yet, optimism is in the air: the deep freeze is behind, and the horizon is brighter. My great hope is that 2014 will prove momentous … the year in which the seven weak years, economically speaking, slide into seven strong years,” she said.

If confirmed, the substantial upgrade to the UK will be a welcome boost to Chancellor George Osborne and his much repeated assertion that the coalition’s “economic plan is working”.

But in the past the IMF has echoed other economists, including experts at the UK’s own Office for Budget Responsibility, that the UK remains over-dependent on consumer spending to grow.

The latest crop of official data underscored those concerns, with weaker outturns for construction and manufacturing and a jump in Christmas retail sales.

Economists generally feel, however, that overall growth will pick up this year and the IMF is just the latest of a string of forecasters to raise the UK’s outlook.

The business group CBI has pencilled in 2014 growth of 2.4%, the British Chambers of Commerce expects 2.7% and the OBR forecasts 2.4%.

A report from EY Item Club on Monday forecast UK economic growth would pick up to 2.7% this year from 1.9% in 2013. It too warned the recovery was not built on solid foundations, however, due largely to the pressure on household incomes.

Peter Spencer, chief economic advisor to the EY ITEM Club comments: “It is hard to find another episode in time where employment has been rising and real wages falling for any significant period of time. The weakness of real earnings is proving to be the government’s Achilles heel and could prove to be the weak spot in the recovery.

“Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt to income ratio.”

There have also been warnings that the recovery is not being felt throughout the UK, and is instead largely benefiting London and the south-east.

A study by the TUC trade unions group on Monday said the recent recovery in jobs had failed to reach the north-east, the north-west, Wales and the south-west, leaving them in the same situation or worse at providing jobs than they were 20 years ago.

The US-based IMF could not be immediately reached for comment. © Guardian News & Media Limited 2010

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With its linked trade and innovation deficits, the UK seems as unprepared for a currency war as it was for real war in 1939. Countries are trying to export deflation somewhere else, using currency manipulation to do so…


Powered by article titled “UK looks ill-prepared if a global currency war breaks out” was written by Larry Elliott economics editor, for The Guardian on Sunday 17th November 2013 19.41 UTC

Rumours of war are in the air. Currency war, that is. The US treasury has forged an alliance with Brussels to attack Germany’s beggar-thy-neighbour approach to the rest of the eurozone. Last week the Czech government said it would defend its economy by driving down the value of  the koruna, following the aggressively interventionist example of  Japan and Switzerland.

It’s not hard to see why the atmosphere is becoming less cordial. This is a low growth world marked by over-capacity. Wages are under downward pressure and this is leading to ever-stronger deflationary pressure. A lack of international policy co-operation means that countries are trying to export deflation somewhere else, using currency manipulation to do so.

If a full-scale currency war does break out Britain looks as ill-prepared as it was for a military fight in 1939. We like to think of ourselves as a nation of buccaneering traders but only 16% of small and medium enterprises, with a turnover of over £20m, are actually exporting. We like to think of ourselves as the nation of innovators, yet as Richard Jones, of Sheffield University, notes, the UK is a less research and development intensive country than it was 30 years ago, and it lags well behind most of its rivals. The UK has linked trade and innovation deficits.

Jones, in a paper for the Sheffield Political Economy Research Institute, examines in detail how during the past 30 years the UK’s corporate laboratories have vanished and how big R&D spenders such as ICI and GEC switched from being companies that thought about long-term investment to ones where the prevailing doctrine was to return the money spent on R&D to shareholders.

Those in charge of UK manufacturing companies became more interested in the next bid, the next deal and the next set of quarterly results than in developing new product ranges.

The consequences of decades of neglect of the country’s productive base and an over-reliance on North Sea oil and financial services are now glaringly apparent. In the past, recessions have ended with the current account broadly in balance. This recovery starts with a current account deficit of more than 3%  of national output.

This is despite a fall of 20% in the value of the pound between 2007 and 2013, which in theory should have boosted exports. In reality, exports grew by 0.4% a year between early 2009 and the start of 2013, compared with 1% a year in the previous decade.

Ministers have a pat answer when quizzed about the poor performance of exports. It is, they say, the result of geography. More than 40% of UK exports go to the eurozone, where growth is weak and demand for imports has collapsed. So the impact of sterling’s depreciation has been blunted.

This view is not shared by the Bank of England. While admitting that the global recovery is patchy, the bank noted in its February inflation report that “the relative weakness of UK exports does not reflect particular weakness in its major trading partners”. It concluded that some other explanation was needed “to explain the disappointing performance of UK exports”, and found it in a sharp drop in exports of financial services and the tendency of UK firms to use a cheaper pound to boost profits rather than increase market share. The decline in exports from the City since the crash highlights the risks for Britain of the “eggs in one basket” approach.

As Ken Coutts and Bob Rowthorn note in a paper on the prospects for the balance of payments, the UK has gone from being a country that had a 10% of GDP surplus in trade in manufactures in 1950 to running a 4% of GDP deficit by 2011. North Sea oil and gas were in decline, so energy added to the deficit by 1.3% of GDP. Food and government transfers to overseas bodies such as the EU, World Bank and UN were the other big debits.

On the other side of the ledger there were three sources of surpluses: financial services and insurance (3.1% of GDP); other knowledge-intensive services, which include law, consultancy and IT (2.5% of GDP); and investment income (1.1% of GDP). Once all the debits and credits were totted up Britain had a current account deficit of 1.9% of national income. This rose to 4% of GDP in 2012.

The recession has taken a heavy toll on two of the surplus sectors. Investment income has turned negative, and global demand for financial services has fallen. This has affected the UK more than the other big global providers of financial services, the US and EU.

According to the Bank of England, “This could reflect lower demand for UK financial services in general, or a particularly sharp fall in demand for those financial products in which the UK specialised prior to the crisis.” This is a polite way of saying that no one any longer wants what Lord Turner once dubbed the City’s “socially useless” products.

Coutts and Rowthorn model what happens to the current account using assumptions for growth in the UK domestic economy and world trade, the level of UK competitiveness, oil prices, North Sea oil and gas production, and returns on financial assets.

The baseline projection is that the current account is 3% of GDP in 2022. Using a slightly more pessimistic assumption, the deficit swells to 5% of GDP. As the authors note: “A deficit of this magnitude would be a cause for serious alarm.”

It certainly would be. The outgoing trade and investment minister, Lord Green, told a conference in the City to mark export week that there was no guarantee the rest of the world would be prepared to finance deficits of this size for ever. The government has a target for raising exports to £1tn a year by 2020 – which will require them to grow by 9% a year. (The average since 2012 has been 5%.)

We have heard the “export or die” message many times in the past, to little effect it has to be said. It is not impossible to improve Britain’s export performance, though doing so with the current economic model is a pipe dream. It will require nurturing manufacturing, knowledge-based services and those bits of the financial services sector for which there is long-term demand.

Britain, Jones says, “needs to build a new developmental state, a state that once again takes responsibility for large-scale technological innovation as the basis for sustainable growth and prosperity”. Amen to that. If a currency war is brewing, we need the can-do spirit of 1940, not the head-in-the-sands approach of 1938. © Guardian News & Media Limited 2010

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