UK economy outlook gets gloomier as trade deficit widens to largest in 15-years, as Chinese slowdown exacerbates global slowdown

Tom Tong10/Aug/2012Currency Updates

GBP

The UK economy took another blow yesterday as it was revealed that Britain’s exports fell sharply in the second quarter. This has further highlighted the malaise the UK economy faces as it tries to climb out of recession amid slowing global growth. Data showed that exports fell by 3.1 per cent in volume, showing Britain’s largest trade deficit in at least 15 years. Analysts have pointed to the crisis of the eurozone, which accounts for roughly 40 per cent of UK exports, as the primary reason. This has been further compounded by slowing growth in the US, and even emerging markets like China. This trade data follows the gloomy assessment ok the UK’s future prospects by the Bank of England only on Wednesday.

Looking on the bright side, The Office for National Statistics suggested that the poor data could have been partly due to the Queen’s diamond jubilee, which gave an extra bank holiday in June. Further optimism can be seen in data for imports, which have remained relatively steady, suggesting that the domestic consumer economy is holding up relatively well. Overall, we continue to see puzzling and conflicting signals for the UK economy, where employment continues to rise despite falling output, and housing data on Wednesday which showed that home repossessions were falling sharply and that mortgage arrears were stable.

USD

Yesterday we saw a continued increase in risk appetite as hopes for further monetary stimulus for struggling economies improved sentiment amongst investors. Stocks broadly rose as safe havens like the, yen, and top tier government bonds fell. The yen hit a 3-week low against the dollar as safe haven flows reversed and the Bank of Japan leaving policy on hold. Labour data released yesterday in the US showed an unexpected decline in weekly jobless claims, and this has helped to offset a string of poor European economic indicators. It also further supports the strong US non-farm payrolls that we saw last week, suggesting that US labour market conditions are fairly stable.

Despite data in China showing a higher-than-forecast fall in the annual rate of factory output to 9.2 per cent in July, hopes for fresh stimulus measures from Beijing were cemented as Chinese inflation slowed for a fourth consecutive month, allowing more room for manoeuvre for the People’s Bank of China. Further underlining the slowdown in China, early this morning we had trade data released which showed exports had only grown at 1 per cent year on year, which was much lower than expected. This weak data has put a dent on some growth currencies, such as the Australian dollar which is closely linked to China.

EUR

Yesterday saw some much needed relief for the eurozone peripheral debt sector, which contributed to the global rally. Spanish 10-year yields dipped to 6.84 per cent, and it’s Italian equivalent fell to 5.81 per cent. However, in spite of the increased risk sentiment in markets, the euro actually trended lower against the dollar. This was in contrast to the Australian dollar and other growth-sensitive currencies. This suggests that the euro has continued to decouple itself from risk assets worldwide.

However, following the poor export data from China early this morning, we have seen these gains in the Australian dollar reversed, as the Aussie is closely linked to the state of the Chinese economy.

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Written by Tom Tong

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