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Why has the UK trade deficit increased?

Is this more bad news? Let’s look at yesterday’s stark figures from the ONS. The UK’s trade deficit in goods and services widened from £2.2bn in February to £3.7bn in March. Although the trade in services remained in surplus to the tune of £3.8bn in March, this was down from the £4.1bn recorded in February. When it comes to the deficit on trade in goods this was up from £6.3bn in February to £7.5bn in March.

Whilst it is true that the UK has not had a surplus on visible trade since 1982 these figures are still poor. In fact exports rose by £0.2bn between February and March but imports rose by £1.4bn. The recent trend in the balance of trade can be seen below.

Balance of Trade Source: ONS

So, how can we make sense of these figures? We all thought that with sterling depreciating as it has we were looking forward to an export-led recovery. What has gone wrong?

There are several answers to this question which either explain or mitigate the extent of the poor trade figures for March. First of all, we had atrocious weather in January. This resulted in a delay in the export of some goods into February which boosted February’s figures more than we would have expected. Therefore, the increase in the deficit in March compared to February is not quite so bad.

Also, although the weakness in sterling should improve our export competitiveness, it does require that these gains are passed on in lower prices by exporters. If exporters raise prices to widen their margins this is not going to help sales. In fact, in March export prices rose by 2.9% whilst import prices rose by 2.7% compared to February.

On top of this, lower prices are not going to help export sales if our main customers are not recovering fast enough to buy our products. The wave of austerity running across Europe at the moment is not going to help us sell more products.

Finally, I mentioned in my blog on Wednesday that UK manufacturing output had risen by 2.3% between February and March which in terms of recent performances was nothing short of staggering. This revival in UK industry is obviously good news. However, the drawback is that this increase in manufacturing has required the import of increased amounts of intermediate and semi-manufactured goods as well as raw materials. This helps to put the increasing trade deficit in a more positive light.

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Posted in Balance of Trade, European Union, Exchange Rates, Manufacturing, sterling

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