Investment and exports suffer from strong pound
Thursday 29 January 1998
The balance of trade in goods went deeper into the red in November, with the deficit reaching pounds 1.48bn, its widest for two years. Excluding trade in erratic items like aircraft and precious stones, the underlying deficit exceed pounds 2bn for the first time in eight years, official figures showed yesterday.
A separate report predicted inward investment would collapse by 25 per cent this year because the high level of sterling had made Britain an unattractive base for the European market.
The National Institute of Economic and Social Research (NIESR), which is forecasting a sharp slowdown in growth with a one-in-four chance of recession, warned the pound had become a serious deterrent even before the Asian crisis.
Nigel Pain of the NIESR said: "The costs of setting up in the UK have increased markedly."
Mr Pain said last year had been the best for inward investment since the late 1980s because many overseas companies had expected the strength of the pound to prove short-lived. "The gestation period is quite a long one, so most of the fall will take place this year," he predicted.
The latest trade figures showed that the value of goods exports declined from pounds 14.3bn in October to pounds 13.8bn the following month.
The growth of underlying export volumes fell 1.3 per cent in the three months to November, while import volumes climbed 2 per cent.
Although exports and imports of services remained broadly stable with a surplus of pounds 664m in November, the trend in the overall trade deficit was worsening, the Office for National Statistics said. The trends showed exports falling and imports rising.
The more up-to-date figures for trade with non-EU countries alone showed a modest rebound in December. The deficit narrowed slightly to pounds 1.11bn from pounds 1.14bn in November, thanks to a 0.7 per cent rise during the month in underlying export volumes.
However, analysts said the past three sets of trade figures confirmed that the long-expected damage from the strong pound was starting to emerge - even though regional figures showed no sign of a drop in exports to Asia yet.
"There are now signs of genuine weakness in both exports and manufacturing output," said Adam Cole, an economist at James Capel.
The NIESR report predicted, like many other forecasts, that falling exports will slow the economy's overall growth sharply in the early part of this year. It said the annual growth rate in the first half of 1998 would be just 1.5 per cent, less than half of last year's pace.
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