Central Banks Can't Always Get What They Want

The UK trade deficit widened in March as imports jumped the most in six months, led by demand for goods from cars to engineering equipment.

The Bank of England is counting on a weak pound to boost exports and support economic growth it helped manufacturing jump the most since 2002 last month. The sovereign debt crisis in Europe has darkened the outlook for UK exporters at a time when domestic demand may come under pressure from measures to tackle the public finances.

“With a fiscal squeeze looming, and set to have knock-on effects on consumer incomes, we think that the onus is still on the external sector to keep the recovery going,” Vicky Redwood, an economist at Capital Economics Ltd. and a former Bank of England official, said in a note. “Recent events in the euro zone -- the UK’s biggest trading partner -- clearly cast a shadow over the longer-term prospects for UK exporters.”

The UK’s trade deficit with the European Union widened to 3.4 billion pounds in March, a three-month high, from 2.9 billion pounds in February. Bank of England Governor Mervyn King yesterday cautioned that the UK economy remains vulnerable to the fiscal crisis in the euro area, its biggest trading partner.

King said that rebalancing the UK economy after the deepest recession on record relied on “a prosperous European economy.”

“We’re seeing a big, big increase in manufacturing,” Alan Clarke, an economist at BNP Paribas in London, said in a phone interview before the report. “It may be that at long last we have an improvement in external demand or are reaping the benefit of a weaker sterling. We’re at the mercy of demand in the euro zone.”

China’s trade surplus shrank 87% in April from a year earlier as imports grew faster than exports because of stimulus-driven domestic demand.

A 79% decline in the trade surplus in the first four months of 2010 from a year earlier may ease pressure for gains in the yuan and support Premier Wen Jiabao’s argument that the currency isn’t undervalued. The sovereign-debt crisis in Europe that today prompted a loan package of almost $1 trillion to help nations under attack from speculators may also encourage Chinese officials to delay ending the yuan’s peg to the dollar.

Yuan gains would be “a disaster,” Song Zimin, an executive in the import and export department of apparel maker Shanghai Dragon Corp., said in an interview at China’s biggest trade fair in Guangzhou on May 3. “If the yuan rises 3%, where’s our profit? Many, many factories will close.”

Chinese President Hu Jintao told his US counterpart Barack Obama last month that the nation will adjust currency policies according to its own need and won’t bow to foreign pressure. US Treasury Secretary Timothy F. Geithner meets with Chinese Vice Premier Wang Qishan in Beijing on May 24-25 for the so-called Strategic and Economic Dialogue between the two nations.

India and Brazil have backed calls from the US and Europe for a stronger yuan.