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Record UK trade gap

The deficit on trade in goods widened to £8.7bn in July, which is the biggest monthly figure since this current series of measurement began in 1998. This deficit compares with one of £7.5bn in June according to figures published yesterday by the Office of National Statistics.

The UK’s balance of trade on goods and services also widened from £3.6bn in June to £3.8bn in July. This was the highest deficit for nearly five years.

The recent trend can be seen in the figure below.

UK Balance of Trade Source: ONS

On the surface this seems particularly disappointing, not to say worrying. With government spending being slashed and consumers being wary about spending, we have been looking to the export sector to boost aggregate demand. However, the additional deficit was largely driven by higher imports rather than a substantial fall in exports. When oil and so-called erratic items are excluded, the volume of exports fell by 0.3% compared to June, whilst the volume of imports rose by 2.5%.

There was a fall of 0.6% in both import and export prices compared with June.

Is there any light amongst the gloom here. Well, possibly. It seems that the increase in imports was largely driven by demand for intermediate and investment goods. This may reflect better health in the UK industrial sector as it looks to meet future demand.

However, the general outlook for exports is poor as we can expect international demand to slow down due to governments around the world trying to cut their budget deficits by reducing spending or raising taxes, meaning that consumers have less to spend and companies have a lower incentive to invest.

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Posted in Balance of Trade, Consumer Expenditure, government spending, Investment, macroeconomic policy

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