Trade deficit widened in Q1
The deficit on trade in goods and services expanded to £13.3 billion in the three months to March, from £12.2 billion in the previous quarter. Higher imports were the main driver. The pickup in imports, along with the recently-released preliminary estimate of GDP for the first quarter showing that the services sector continued to be the main growth driver, indicates that domestic demand remained firm at the start of the year.
Yet the news on exports was a little brighter than previously. Exports rose for the first time in three quarters, solely driven by shipments of goods. The story was similar for manufactured goods exports. The breakdown by region showed that shipment to EU countries picked up, indicating Europe’s economy recovery supported demand for UK goods. In contrast, exports to non-EU countries deteriorated, weighed down by lower shipments to Norway, South Korea and Switzerland. Nevertheless, exports to key non-EU destinations such as the US and China gained ground.
Net exports still a drag
The widening of the trade deficit suggests that the drag on GDP growth from net exports was larger than in the final quarter of 2015, when it subtracted 0.3 percentage points. While the recently released preliminary estimate of first quarter GDP showed that economic growth slowed to 0.4%, we have to wait until late this month to see how the expenditure components such as net exports fared. If the report confirms that net exports dragged on GDP growth, it would be yet another setback in rebalancing the UK economy away from its heavy reliance on private consumption.
The bottom line
Exports are set to remain under pressure in the coming months as global economic growth stays subdued. The recovery in the EU countries, along with the recent weakness of Sterling, should provide some support but there is still a long way to go to reach the government’s target of £1 trillion annually by 2020.