The UK’s trade deficit remains a notable thorn in the side of UK economy and the British Pound. News that it has narrowed will be welcomed by policy-makers.
October’s trade figures released by the ONS on Friday December 9 shows a sharp narrowing in the trade deficit in October, following a large upward revision to the Q3 figures.
“The narrowing in the trade in goods and services deficit by £3.8bn in October was a welcome development and larger than the consensus of economists expected,” says Scott Bowman at Capital Economics.
But it’s not all good news as the release contained significant revisions to earlier data due to a previous processing error by the ONS.
The Q3 deficit of £14.9bn was the widest on a quarterly basis since Q4 2013 and up from £8.2bn in Q2.
This suggests that the current account deficit probably widened in Q3.
The trade deficit reflects the UK’s reliance on imported goods - years of a strong currency and favourable trading terms have meant UK businesses can rely heavily on imports.
As can be seen, the UK is actually an exporter of services:
This is however highly problematic in that the value of the Pound would typically fall in such a scenario.
But, huge investment inflows into the UK - long seen as a safe and good place to invest - has ensured Sterling has remained at levels above that justified by the trade accounts.
Therefore, should this “reliance on strangers” - as Mark Carney once described it - dries up then the Pound would have to fall.
This appears to have happened since the EU referendum.
The good news is that the weaker Pound should assist the UK economy break away from a reliance on imports as consumers and businesses shift towards domestically-produced goods.
"The drop in the Pound should support net trade’s contribution to GDP growth in the coming months," says Bowman. "The recent marked rise in survey measures of export orders suggests that export growth will pick up in the coming months. This should help support GDP growth and ensure that the trade deficit narrows in the coming quarters, following the historically-wide deficit recorded in Q3."
Further, demand for British exports should pick up.
Perhaps today’s data reflects this shift.