The trade deficit has widened, but there are reasons for optimism

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Today's trade figures, showing that the deficit on trade in goods has widened to £9.8 billion, are not altogether encouraging. Even though – once again – exports increased, imports rose at a faster rate.

There is unlikely to be much improvement in trade over the next few months, as the Eurozone crisis is weighing heavily on confidence. This is causing firms to hold off on investment and customers to hold back on placing orders. The impact this will have on the deficit is somewhat unclear, though. It is entirely likely that both imports and exports will fall as economic uncertainty saps demand at home and abroad. This weak demand is not great news for growth prospects in the short term.

But in the medium term there are reasons for optimism.

The UK's largest export market is Western Europe, but in the last five years UK exporters have been developing and expanding in a wide range of new markets from Eastern Europe, to the Middle East and Asia.

UK exports to markets outside Europe have grown rapidly% change in exports 2005-2010Source: HMRC, 2011

Newer markets have been the driving force behind export growth. In the last five years exports to Europe grew by 14%. Exports to the BRIC economies grew by over 100%.

And there is evidence post-recession that this trend is continuing. Exports to the BRIC economies were 44% higher in 2011q2 than 2009q4. These four countries alone have accounted for 14% of export growth since the recession ended. Today's figures give us reason to believe this growth is set to continue, for example they show that the UK's exports of cars to markets outside of the EU are growing strongly.

Uncertainty in the Eurozone will hurt demand in the short term. But demand from emerging markets is likely to be a growing source of strength in 2012 and beyond.


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