Exports up, Trade Deficit Down thanks to the Pound

A larger than expected jump in exports sees the UK’s trade deficit for March narrow.

You wait ages for good news about the economy and then two come along at once. Yesterday we saw a big jump in the manufacturing sector and today we the UK’s trade narrowed.

It was a sign – a small sign perhaps – that recent poor trade performances might just have turned a corner.

The UK’s deficit in goods and services is estimated at £3.3bn in April, which is down from £3.5bn in March – its lowest level since September last year. In goods alone the deficit was £10.5bn in April 2016 – down by £0.1bn from March 2016.

Both figures are down to a big jump in exports. Goods saw an increase of £2.2bn to £26.1bn, the biggest increase since January 2003, and imports jumped by £2.0bn to £36.6bn.

Overall the last three months have seen a consistent narrowing of the deficit in trade and goods of £2.1bn. It now stands at £11.3bn. Goods alone narrowed by £1.5bn to a deficit of £32.6bn between January and April. Exports were up by 6.4% and imports by 2.9%.

The data paints a much more welcome story than back in May when March’s figures showed a deficit marching onwards.

Despite a small improvement in March the first quarter’s figures showed Britain’s deficit was the biggest since 2008 – prompting one analyst to describe them as truly horrible.

As growth also slowed by 0.4% it was taken as a sign that the Chancellor’s green shoots of recovery were withering and dying beneath the weight of global economic conditions.

There is indeed plenty to be worried about – uncertainty over Britain’s continued membership of the European Union, a slowdown in China and a continued sluggish oil price, to name just a few.

However, even before the announcement, analysts were in a good mood suggesting Sterling could rebound against the Euro after losses yesterday. The final results slightly surpassed even those expectations.

Howard Archer, Chief Economist at IHS Global Insight suggested that they could be a positive sign for GDP moving into the second quarter.

“April’s data suggests that net trade could actually make a positive contribution to UK GDP growth in the second quarter, having been a significant drag in the first quarter of 2016 and through the second half of 2015,” he stated.

Others have been more cautious.

“Despite the narrowing in the UK’s trade deficit for April, net trade is still not providing much support to the economy,” said Scot Bowman of Capital Economics. “It still looks as if net trade is subtracting from GDP, with the three-month growth rate in goods import volumes of 4.6% outweighing the 1.2% growth rate in goods export volumes.”

Inevitably, this news will play into the wider debate surrounding the referendum, which could be extremely bad news for George Osborne according to Dennis de Jong, managing director of UFX.com. “With the EU referendum on the horizon, both the Leave and Remain camps will likely look to twist this data to their own ends,” he said. “Leave will argue the deficit is all the more reason for Britain to focus on trade relationships beyond Europe, while Remain will caution against the damage a Brexit could do to a trade deficit which is already causing concern.”

As production slowed at the end of 2015 and in the first quarter of 2016, the deficit was seen a major drag.

However, as the ONS revised downwards its trade deficit figures for March, it has suggested that the drag may have been less of a factor than it previously believed.

Cheapear Pound Starting to Make a Positive Impact

A weaker sterling is not as bad as we in the press would often imply.

Remember, a cheaper currency makes the goods a country produces cheaper on international markets.

The June trade figures show exports grew by the largest monthly amount since the first quarter of 2010, mainly driven by an almost 10% increase in the export of goods.

"This coincided with the pound depreciating, possibly in response to EU referendum campaigning stepping up a notch, with the official Leave and Remain campaign groups designated in the middle of April. It seems increased political activity created market jitters which saw markets sell off sterling, causing it to depreciate," says Michael Martins, Economist at the Institute of Directors.
 
The cheaper pound may have helped exports of goods like chemicals and machinery, but while depreciation can help exporters, the flip-side is that if the pound stays low it means higher prices for importers.

It is also worth pointing out that these types of export goods are the most likely to be subject to tariffs in the event of Britain leaving the EU, so any positive effect may be short-lived.

"The truth is that we just don’t know what tariffs UK goods will face in the event of Brexit,” says Martins