What's the deal with trade deficit?

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Last week saw some revisions to the data telling us what’s going on with the UK economy. George already blogged about what happened with business investment (summary in a sentence: there’s not been anywhere near as much of it as we thought) and today I’m going to take a look at what happened with the trade data.

The post-recession exports a bit better than we thought

One headline from the trade revisions is pretty positive. Since 2013, exports were stronger than we thought , good news since growing exports is a key part of cutting the trade deficit and achieving better balanced growth.

Exportrevisions

Despite the upwards revisions exports were only worth £517bn in 2014, leaving us a long way short of the £1trn export target. Indeed, from their trough in 2009, annual exports have only increased by 16%. To hit the export target in 2020 we’d now need annual growth of almost 12% to reach the target. Overall the export picture may have improved, but it hasn’t made hitting the target much more likely.

Where does this leave the balance?

Exports weren’t the only thing that were stronger than we supposed: imports were too. The fact that imports and exports were both stronger than previously thought suggests that both domestic and overseas demand were also stronger than we thought, which could be taken as a positive. However – unfortunately – because imports were revised up more than exports, this means that the deficit is also larger than we previously thought. Not great news for the economy.

Deficitrevisions

And today’s data…

Data released today, suggests things are heading in the wrong direction on the deficit, the combined trade deficit of the first two months of quarter 3 (July and August) 2015 is already double the total trade deficit in quarter 2 (April to June) 2015.

The weakness is largely due to a bad July, when exports fell 7% and imports rose 2%. Both exports and imports headed in the right direction for an improving deficit in August.

This highlights the challenging conditions that currently persist for exporters in global markets. August’s bounce in export sales was not enough to counter weakness in July, and the UK now looks set for a large trade deficit in Q3, with the data showing weakness in major markets such as the US (chemicals exports were down) and China (linked to a fall  in motor vehicles exports). However, a ray of light in the three-month picture is the slight narrowing of the deficit with the EU, with exports to the region up 2%.

The outlook

Improving the trade deficit anytime soon will be an uphill struggle as the outlook for export growth remains pretty weak. In the IMF's World Economic Outlook report earlier this week, growth prospects in most markets were revised down. In addition, our most recent Manufacturing Outlook survey showed that manufacturers expected export orders to continue to fall.

Weakness in external demand is just one of the challenges facing the manufacturing sector at the moment. It is critical that the upcoming Autumn Statement and Spending Review put in place the building blocks for future growth in 2016, creating a competitive business environment with support for growing businesses.

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