Trade and the J-Curve
Its all about trade if you follow international politics.
Why did some commentators forecast that the fall in the value of Sterling is good for UK trade, but despite this, the latest trade figures for September just saw one of the worst deficits on record? It’s textbook economics:
Foreigners who wish to buy our services and goods will find them cheaper now. However, total exports from the United Kingdom decreased by 0.4 percent to GBP 45.4 billion in September from August of 2016. Exports of goods also declined by 0.8 percent to GBP 26.08 billion. Imports zoomed up to a historic high of over £50bn. Why? Because firms need to honour their longer term contracts, leading to a worsening trade balance initially. For example, an order placed in May for machinery from, say Italy, has now become more expensive, so weighs heavier on imports. This is the downward stroke of the J. Once new orders are negotiated with British suppliers, economic theory says that we can look forward to the upstroke of the J.
