The American economy has once again confounded the pundits, posting GDP growth of 3.2% in the third quarter, well above the 2.5% consensus estimate. For those of us who have spent two decades watching the City's tea leaves, this is no surprise. The US consumer, armed with excess savings and a resilient labour market, continues to spend with abandon. Meanwhile, the Federal Reserve's hawkish stance has kept inflation in check without tipping the economy into recession. It's a delicate balancing act, a high-wire performance that would make even the most seasoned central banker break a sweat.
But what does this mean for British exporters? The answer is a familiar one: more pain. A stronger US economy means a stronger dollar, and a stronger dollar means British goods become more expensive across the Atlantic. For manufacturers already grappling with post-Brexit red tape and elevated energy costs, this is an unwelcome headwind. The Office for National Statistics reported that exports to the US fell by 2.4% in the last quarter, a trend that is likely to intensify.
Consider the plight of a Midlands car parts manufacturer. Their margins are already razor thin, squeezed by higher borrowing costs and supplier price increases. Now they face a double blow: a stronger dollar erodes their competitiveness in the US market, while the weaker pound makes imported raw materials more expensive. This is the kind of profit squeeze that keeps CFOs awake at night.
Of course, there are some silver linings. A weaker pound boosts the value of overseas earnings for multinationals. But for the export sector which accounts for around 30% of UK GDP the news is decidedly negative. The market has already priced in this divergence. The pound sterling has fallen 4% against the dollar since the start of the year, a reflection of the growing gap between the US and UK economic trajectories.
What about fiscal responsibility? The UK government's decision to raise corporation tax to 25% next year will further erode the competitiveness of British firms. In contrast, the US has maintained a 21% corporate rate, with talk of further cuts. This is a race to the bottom, and the UK is losing. Capital flight is a real concern. We are already seeing an uptick in British firms redomiciling to the US or expanding their American operations. The flow of investment dollars across the Atlantic is a one-way street.
Gilt yields, the benchmark for UK borrowing costs, have risen in sympathy with US Treasury yields. This increases the cost of servicing the UK's debt, which is already above 100% of GDP. The Chancellor's fiscal headroom is evaporating, leaving little room for tax cuts or spending increases. It's a fiscal straitjacket tightened by global forces.
Central bank policy is the other shoe waiting to drop. The Bank of England finds itself in a difficult position. It must raise rates to combat inflation, but doing so risks choking off growth and exacerbating the housing market correction. The Fed, by contrast, has more flexibility thanks to a hotter economy. This policy divergence will keep the pound under pressure, and keep British exporters on the defensive.
In the end, markets reward efficiency. The US economy is demonstrating greater dynamism and flexibility. British exporters must adapt or perish. They need to improve productivity, diversify supply chains, and hedge currency risk. The government, for its part, must focus on creating a competitive tax environment and reducing regulatory burdens. But given the current trajectory, I wouldn't hold my breath.
The bottom line is this: the US economy's defiance of forecasts is a testament to its underlying strength. For British exporters, it is a warning shot. The competitive pressure is mounting, and there is no relief in sight. The City will be watching the next round of trade data with a sense of grim anticipation.
