U.K. Trade Deficit falls Faster than Expected thanks to Boost in Car Exports

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The U.K.'s trade deficit in goods fell to -£9.73BN in September, a much stronger reading then the -£11.40BN forecast by markets.

According to the ONS, this ensures the total trade deficit (goods and services) narrowed £3.2BN to £2.9BN in the three months to September 2018, due mainly to the improving goods balance.

Encouragingly, the fall in the deficit was driven largely by a rise in exports, which increased £5.0 billion compared with a £2.1BN rise in goods imports, resulting in the goods deficit narrowing £2.9 billion to £31.9BN in the three months to September 2018.

Cars had the single-largest impact on the goods balance due to a combined £1.0BN rise in non-EU exports and £1.7 billion fall in EU imports in the three months to September 2018.

Because the U.K. has a large trade deficit the country requires large amounts of inward foreign investment to 'balance the books' and ensure Sterling maintains a steady valuation. The fear following the E.U. referendum is that a fall in foreign investment would leave Sterling exposed.

Therefore, improvements in the trade position, the make the U.K. less reliant on foreign investors is a positive for the longer-term fundamental valuations of the Pound.

Concerning the outlook, economists are wary of the solid pick-up in exports extending, owing to a slowdown in global trade over recent months.

"Car exports look set to fall sharply again soon, following announcements by manufacturers that they are shortening employees’ working weeks," says Samuel Tombs, Chief U.K. Economist with Pantheon Macroeconomics. "Meanwhile, the plunge in car imports is linked to the introduction of new emissions tests, which had led to higher-than-usual imports in prior months. Car imports should mean-revert over the coming months, given that underlying consumer demand is broadly flat."

It is also worth noting survey data suggest export orders have fallen sharply over the last three months, pointing to a flat trend in export volumes ahead.

"There remains a risk too that firms stockpile imported goods, due to the risk of a no-deal Brexit. Accordingly, we still expect the monthly trade deficit to revert to the £2.0B mark over the coming months," says Tombs.