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Growth in U.K. Exports to Feed into Sturdier Pound in 2018: Nomura

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Pound Sterling is likely to extend higher over coming months thanks in large to an ongoing global economic recovery, which is expected to fuel increased demand for UK exports.

Predictions of a steep decline following in U.K. economic activity following the E.U. referendum have, in hindsight, been proven to be overly pessimistic; economic growth has slowed, but not as badly as they thought.

New research from global investment bank Nomura suggests the U.K. economy will probably continue to outperform expectations in the year ahead; something that should also see the Pound outperform the more negative forecasts.

And, a boost in U.K. exports appear to be one driver of growth that can be relied on going forward.

George Buckley, an analyst with Nomura, says the latest economic growth results from the U.K. show the largest single component to be UK Exports or "+ Net X" on the chart below:

"As Figure 2 shows, the largest positive contributor to the current 1.5% annual rate of GDP growth is net exports," says Buckley.

Buckley's assessment comes on the day it is revealed that U.K. manufacturing is booming with the Markit/CIPS Manufacturing PMI hitting a multi-year high - thanks in no small part to continued export growth.

Official U.K. export data from the ONS are also up on an annual basis by 6.0% in Q3 - "its highest since the start of 2017, while import growth fell to 1.5%, its lowest since the start of 2013. The difference between the two growth rates in Q3 (4.6pp) was the largest for six years."

There are two main reasons for the extraordinary growth in exports, according to the Nomura researcher.

The first is due to global growth; the second the weak Pound.

"The world economy continues to surge ahead. Our forecasts for world growth remain strong at 3.7% for this year and next," says Buckley.

The two largest export markets for the U.K.: the euro area and the US, are also expected to grow quite strongly at a rate of between 2.0% and 2.5% in 2017 and 2018.

The the other reason for the rise in exports is the weak currency, which makes British exports more affordable to foreign buyers, and, relatively speaking, more competitively priced than they were before.

Will the Trend Continue?

Nomura think it will. They expect the global economy to grow at close to the same rates in 2018, before, "moderating" in 2019.

They point out several reasons why:

Survey results for different sectors, such as the Purchasing Manager Survey (PMI), produced by IHS Markit, often give a 'heads up' of trouble ahead but remain buoyant globally.

Fiscal policy - which means government spending - is expected to become more generous globally rather than more austere.

Inflation will remain remarkably subdued and therefore monetary policy, which response to inflation by putting up interest rates, will also stay 'accommodative', keeping interest rates low.

Lower interest rates keep borrowing cheaper which helps oil growth.

Domestic demand from consumers will remain strong because, argues Nomura, it has become 'self-sustaining'.

Following the great financial crisis it broke down, but all the work done since then by the authorities to repair bank balance sheets has helped kick-start a new continuous cycle of demand.

Finally, say Nomura, the risks to global growth from the three bugbears of rising oil prices, slowing China and rising interest rates are overstated.

When the positives of the economics are combined with the prospect of a steady flow of progress in Brexit negotiations, the prospect of higher interest rates at the Bank of England in turn increase.

This adds upside to the Pound.

"We think the positive Brexit news is a surprise to markets and thus positioning is not
currently short. If we were to get better data and, indeed, a more hawkish BoE, then this could be an added kicker and GBP should rise with it," says Buckley.

Forecasts for the Pound

Based on their expectations for continued high growth on the back of global demand for 'made in GB', Nomura sees the Pound rising versus the Euro to 1.15.

Against the Dollar, they forecast a rise to 1.40 in 2018 but are less certain because Tax Reform could breathe new life into the Dollar if it becomes increasingly likely that it is approved.

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