Trade figures out earlier today show that the UK hit a record trade in goods deficit with the EU at £23.6bn in January 2016. An improving trade balance with non-EU countries in the three months to January was entirely offset by a 1.5bn widening of the deficit with the EU. Fuel exports were the main drag for the UK’s trade with the EU, falling by 0.9bn.
What’s bad for manufacturing is bad for exports
A tough 2015 for UK manufacturing does not bode well for the UK’s trade balance. In particular, the collapse in the oil price has been detrimental to crude oil exports which have fallen by nearly £5bn in the past two years.
In the three months to January 2016, chemical and oil exports fell by a hefty 8.7% and 9.3% respectively. On the bright side, some of these falls were partially offset by an increase in aircraft exports by £0.5bn or a healthy 17.8% rise.
Over the year, total manufactured goods exports were down by 3.7% compared to the three months to January 2015, highlighting subdued export demand and an uncompetitive exchange rate, both key themes throughout last year.
But services exports have also taken a tumble
The weakness in the UK’s performance over the past quarter is not limited to the export of goods. Between the three months to October 2015 and the three months to January 2016, the trade in services surplus narrowed by £2bn, reflecting a 2.6% decline in exports and a 1.5% increase in imports. The surplus also narrowed compared to the same three months to January 2015 by around £3.3bn, with the tough global economic situation taking its toll on the services trade too. Still, the trade in services surplus in January 2016 was £20.5bn compared to a £32.3bn deficit for trade in goods.
What’s in store for goods exports in the next three months?
With the main weakness in the trade figures being the widening deficit with the EU, our Outlook q1 2016 survey shows we might be in for a bit of a turnaround. The sterling’s depreciation by around 9% since November 2015 could restore some of the UK’s lost export competitiveness with the EU. But also manufacturers are increasingly looking to Europe for export opportunities, where they see some improvement in demand conditions.
What about 2016 as a whole?
We expect a better year for UK trade in goods, with the sterling depreciation likely to continue as the BoE pushes its base rate hike further down the line and the impending EU referendum is weighing on the pound. Manufacturers are also pricing in for a bit of a pick-up in export demand from key partners, such as the EU, as well as China, where exports saw a boost in the three months to January.
Still, it will probably take more to achieve a positive contribution to GDP from net trade, with global trade growth still subdued and uncertainty about the world economy very much in play.