- The trade balance in goods improved by £ 1.2bn in July.
- Exports to the EU saw the largest increase, helping to offset declines from the US and China.
- Oil exports explain the most part of the increase. Exports of manufactured goods improved only slightly.
- The Sterling depreciation puts pressure on profit margins abroad.
The trade balance in goods narrowed in July as exports soared
In July, exports in goods edged up by 3.4% in value terms while imports fell by 0.9%. As a result, the trade balance in goods improved by £1.2bn, the deficit now standing at £11.8bn.
Flourishing exports to the EU
EU countries received most of UK exported goods in July. Exports to the EU totalled £ 12.5bn over the month, rising by 9.1% compared to June. This more than offset the drop in exports to non-EU countries, particularly towards China and the US which both fell by 11.3% and 6.5% respectively. This is consistent with the results we reported earlier this week in our 2016q3 Manufacturing Outlook, where companies have highlighted improving export orders from the EU over the past three months.
Exchange rate related?
By commodity, it appears that most of the July increase is due to the significant rise in oil exports which grew by 36.6% compared to June. Finished manufactures – particularly capital goods – also contributed but to a lesser extent, increasing moderately by 1.5%.
Again this in line with the trends we described in our 2016q3 Manufacturing Outlook, where electronics and electrical equipment posted the most positive balances in export orders. These sectors were expecting some momentum in export activity since the start of the year, suggesting that the Sterling depreciation’s is not the only factor.
Margin pressures… again
The Sterling depreciation did not translate into lower export prices in July. In contrast, they edged up by 3.7% compared to June. This partly reflects the rise in manufacturers’ production costs that we’ve seen last month. As a large proportion of inputs used in the production process are produced abroad, the exchange rate depreciation translated into higher import prices and thus increased manufacturers’ costs. It is also worth to note that some export contracts are agreed in foreign currencies, which could offset the impact on export prices of exchange rate movements.
While we stressed earlier that manufacturers’ margins on domestic sales might be at risk in the short term, it appears that this is also the case for profit margins on overseas sales. In fact, manufacturers experienced a decline in export margins over the past three months as highlighted in our 2016q3 Manufacturing Outlook. And while they anticipate the trend to reverse domestically as the depreciation passes through into higher output prices, they see little improvement to export margins in the next three months.