November trade figures released today are grim and show little evidence of the benefits promised by the many advocates of sterling depreciation, including Bank of England Governor Mervyn King.
The ratio of export volumes to import volumes, excluding oil and erratic items, slumped to its lowest level since December 2007 – see first chart.
Trade adjustment takes time but manufacturers are likely to have been constrained from taking advantage of improved price competitiveness by their lack of access to credit. As previously argued, sterling’s plunge may have contributed to credit restriction by accelerating a withdrawal of foreign funds from the banking system.
Meanwhile, the annual increase in manufactured import prices reached 14% in November and may hit 15-20% soon as a result of the further fall in the exchange rate – second chart. Manufactured imports account for 17% of domestic demand – the 14% rise implies a cut of 2.4% in real domestic purchasing power.
Devaluationists will no doubt argue that trade performance would have been even worse but for the exchange rate fall, while conveniently ignoring its negative effects on spending power and credit availability. The myth that the recovery of the early 1990s depended on a prior collapse in sterling continues to exert a strong influence.
