UK Trade Deficit Grows as Imports Rocket, But Balance Could be Restored by Weaker Pound Sterling

International trade Pound Sterling

The UK’s trade deficit with the rest of the world may start closing as the decline in the UK’s Pound makes UK produce cheaper on the international market.

Data from the Office for National Statistics shows the UK’s deficit on trade in goods and services was estimated to have been £5.1 billion in June 2016, a widening of £0.9 billion from May 2016.

The data came before the EU referendum, a time when Sterling still commanded strong buying power.

Exports increased by £1.0 billion and imports increased by £1.9 billion.

Imports reached a record high of £48.9 billion.

The deficit on trade in goods was £12.4 billion in June 2016, widening by £0.9 billion from May 2016.

The ONS reports this widening reflected an increase in exports of £1.0 billion to £24.6 billion and an increase in imports of £1.8 billion to £37.0 billion.

This will likely place further pressure on an already stretched current account deficit which many see as being the route to a weaker British Pound.

The current account is essentially the country's bank balance with the rest of the world and is determined by imports, exports and capital inflows.

Because the UK is a net importer it requires capital inflows from foreign investors to ensure the Pound remains elevated.

The worry is that the vote to leave the EU may spook foreign investors, ensuring those capital inflows are reduced, thereby triggering a fall in the Pound.

However, with the Pound on target to test its lowest levels since 1985 against the US Dollar, there is the prospect that exports may start to rise, ensuring the large deficit on the country's current account starts to close.

The 14% fall in Sterling since the referendum should theoretically also make UK products and services cheaper by a similar margin.

The Bank of England has meanwhile noted that it would expect the rising cost of imports to benefit home-grown suppliers, further boosting UK economic activity as demand turns inward.

So, in theory the falling Pound should lower imports and boost exports.

This potential shift in dynamic could well ensure the trade deficit starts to close over coming months.

We have already seen the impact of a cheaper Pound Sterling on tourism with reports that flight bookings to Britain rose in the month following the referendum as international visitors sought to take advantage of a cheaper UK-based holiday after a slump in the pound.

"Brexit had an immediate, positive impact on inbound tourism to the UK, which is converting into better than anticipated arrivals," says ForwardKeys' Chief Executive Olivier Jager

Just as UK-based producers are expected to enjoy increased domestic demand, so too can domestic leisure providers as Britons looks to holiday at home this year as the cost of buying USD and EUR rises.

 

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