Some positive news for trade in October as the deficit narrowed from September by £0.8 billion to £2.0 billion. Most of the fall was down to a decline in imports of £0.7 billion and specifically fuel imports from countries outside the EU. This reflects a pushback to more typical levels following the September high.
Encouragingly, goods exports did contribute to the fall in the deficit with an increase of £0.2 billion. However, half of the increase was accounted by exports in erratic items – mostly silver – which cast doubts over whether this boost in exports will be sustained. In fact, exports in machinery, transport equipment and chemicals all fell.
Three-month data less jolly
In the less volatile three month data, the trade in goods deficit narrowed by £1.3 billion but exclusively down to a decrease of £1.9 billion in imports. This was mostly down to a £900 million fall in the imports of aircraft from non-EU countries. Over the same period, goods exports fell by £0.6 billion.
The narrowing was partially offset by the balance of trade in fuels, which widened by £0.9 billion over the quarter. The massive fall in oil prices since the summer has meant that firms look to import cheap fuel from abroad rather than pay a premium on domestically produced fuel.
There is a declining trend in both the volume and value of trade compared to the same three months a year ago. This tallies well with the global economic outlook of slowing growth and disinflation across the board.
For the UK, weakening global conditions have put the lid on the fast pace of growth achieved in the first half of the year. This has translated to a 1.9% decline in goods imports from the previous three months as the general slowdown in domestic economic activity since Q3 is rubbing off on trade.
Where’s the deficit?
The UK continues to hold its largest deficit with the EU. Over the year, the appreciation in the Pound and deflation in the Eurozone means that UK exports are less price-competitive in the continent while imports are more attractive. Monthly data did show an improvement in the trade deficit with the EU; exports increased by £0.1 billion and imports fell by £0.3 billion.
However, the three month data for trade with the EU is similar to the overall figures where the trade deficit narrowed as imports decreased at a faster rate than exports. Most notably, the cooling in the German economy over the last quarter has led to a slowdown in trade between the two countries; UK exports to Germany fell by £0.6 billion and imports declined by £0.3 billion.
Overall, the UK’s trade balance with its two largest trading partners – the US and Germany – worsened in the three months to October. The UK’s surplus with the US fell to £1.3 billion from £2.7 billion in the previous three months, while its trade deficit with Germany widened by another £0.3 billion to £7.6 billion.
The export challenge
Strong economic growth in the UK has led to a significant boost in domestic production. However, this has not translated to an improvement in its trade balance with the rest of the world. Partly, the UK is a victim of its own success; solid growth in the UK and poor growth elsewhere – particularly the Eurozone –has meant dried up demand for UK exports and upward pressures on the Pound.
However, this is only a small part of the story. Historically, the UK economy has been heavily reliant on consumption to drive economic growth. This means that improvements to the UK’s long-term trade performance need to come from a more balanced growth model based on investment, innovation and exports. Today’s data is another reminder that there is still a long way to go.