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UK Scores Record Quarterly Trade Surplus But It's Just a Mirage, Economists Say

- UK posts Q4 trade surplus on strong goods performance.

- Even as overall manufacturing, industrial sector contracted. 

- Quarterly surplus a "record" but ONS says it's just a mirage.

- Precious metal exports disguise an otherwise weak quarter. 

- UK trade faces tough year on EU negotiations, coronavirus.

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The UK achieved a record quarterly trade surplus in late 2019 but the Office for National Statistics (ONS) suggests it's just a mirage because precious metals exports disguised an otherwise dire period for manufacturers. 

Last quarter saw the UK swing from a quarterly goods and services deficit of some -£3.38 bn to a surplus of £5.89 bn, the first net-positive quarterly trade number to be seen in the UK since at least the beginning of 1998. This followed surpluses of £7.7 bn and £1.82 bn for December and November respectively. 

Tables of the quarterly balances are available for 1998-2008 and 2008-2020.

The quarterly surplus came after goods exports rose nearly £10 bn at the same time as imports fell by almost £5 bn. Meanwhile, services imports increased and exports fell, leading that surplus to fall from £26.1 bn to £20.95 bn. 

This purportedly strong finish reduced the annual goods and services deficit from £29.78 bn to £29.29 bn, keeping it steady around 1.3% of GDP.

The ONS says the quarterly number is "a record" for the UK economy but suggests such characterisation would be misleading because precious metals exports have disguised an otherwise weak quarter.

"Admittedly, the trade deficit, excluding erratics, was a meagre £0.9B in December, below the average of the previous 12 months, £3.2B. But this was driven by a temporary slump in imports, as U.K. firms ran down their stocks of foreign-produced goods, instead of placing new orders, as the PM’s Brexit deal in October took the risk of no-deal effectively off the table," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics

Above: ONS graph showing diverging trade balances for data series including and excluding precious metals. 

Last quarter's trade surplus was worth around 1.1% of GDP, the ONS says, but when the precious metals transactions are removed from the data the UK is left with a deficit of 1.2% of GDP. And lurking behind these numbers was a dire quarter for the manufacturing and industrial sectors. 

"A key factor behind this was the shutdowns enacted by carmakers in early November aimed at safeguarding against the risk of supply chain disruption in the event of a disorderly Brexit. Weaker external demand also looks to have played a part, with a number of Eurozone countries having reported dismal December industrial production," says George Brown, an economist at Investec.

UK manufacturing production rose only 0.3% in December when economists were looking for a 0.5% increase, although even that growth came only because of an uptick in the transport subsector. Elsewhere, nine out of all 13 subsectors saw output contract in the final month of the year, rounding off a terrible quarter. 

Manufacturing output fell 2.5% in the recent quarter and by 1.5% for the year. Meanwhile, industrial production grew 0.1% in December but declined 2% for the quarter and by 1.3% for year. Industrial firms were off course blighted by multiple extended deadlines for the UK's departure from the EU last year in addition to ongoing uncertainty over the future trade relationship. 

"Demand for exports likely will remain weak throughout 2020, amid a weak global backdrop and continued uncertainty about the U.K.’s future trade links. The risk of the emergence of significant barriers to trade in 2021 will dissuade overseas customers from integrating U.K. suppliers into their supply chains," says Pantheon's Tombs. "Accordingly, we expect net trade to continue to dampen GDP growth modestly next year."

 

Above: Pantheon Macroeconomics graph showing 'net trade' dragging on UK economic growth in 2019. 

Furthermore, with a 'no deal' Brexit still on the table to some extent and the negotiations not even begun, the year ahead is currently offering firms only more uncertainty on the trade front. In addition, UK firms will also have to contend with whatever the impact of the coronavirus that's effectively shut down vast parts of China's economy in recent weeks, which is a bad omen for some of the country's largest trading partners over in the Eurozone. 

The Eurozone suffered from the 18-month U.S.-China trade war and arguably more than either protagonist, so it could again be burdened by a slowdown resulting from the deadly pneumonia-like disease that's killed more people than the SARS outbreak of 2002-2003 and has spread to dozens of countries. 

Both UK and Eurozone economies already saw soft finishes to last year, with international trade weighing heavily, even before any virus impact. The UK economy grew by an annualised 1.1% in the final quarter, only a little faster than the 1% seen in the Eurozone. However, and in spite of the Brexit risks and litany of international headwinds, many economists see scope for 2020 to mark a turnaround for the UK economy.

"Stimulative fiscal policies can reinforce the uptick in private spending. Johnson has already legislated for the fastest growth in day-to-day government spending in 15 years. Expect a major step up in investment spending at the upcoming budget on 11 March. Fiscal stimulus could contribute 0.7ppt to headline GDP growth in 2020 and c0.3ppt in 2021," says Kallum Pickering, an economist Berenberg. "Facing fewer political risks at home, consumers should now have the confidence to spend more."

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