Disappointing August Trade Deficit Data Masks Broader Improvement

Beyond the third quarter, the broader trend in trade is more positive and the prospect remains that it could still add meaningfully to growth over the coming quarters.

The UK’s trade deficit widened during the three months to the end of August as imports edge upward while exports took a leg down.

However, the disappointing set of one-month numbers overlooks a broader shift that has been positive for the UK’s trade balance with the rest of the world, which economists say could see a pick-up in net trade for the year overall.

Office for National Statistics data released Tuesday showed the UK trade deficit widening by £6.2 billion during the three months to the end of August, taking the total to -£13.2 billion.

The trade balance, which is either a deficit or a surplus, measures the UK’s trade in goods and services with the rest of the world. A deficit means the UK has imported more than it has exported and vice versa.

The quarter’s combination of a 1.4% (£2.1 billion) fall in exports and a 2.5% (£4.1 billion) increase in imports was behind the recent deterioration.

Falling outbound shipments of fuels, chemicals and unspecified goods were the biggest drivers of the decline in exports. Meanwhile, higher imports of unspecified goods were by far the largest driver of the increase in imports.

The composition of Britain’s trade deficit also shifted during the recent period, with exports to EU countries rising while shipments to the rest of the world fell, whereas in recent years the reverse has been true.

Increases in imports from the rest of the world also grew faster than imports from the EU, suggesting it was the UK’s trade with the rest of the world that added most to the deficit during the period.

The Broader Trend Is More Positive

Economists often lament the erratic month to month swings of trade balance data, which have as much to do with the difficulty in collecting and measuring data as they do with changes in actual trade.

“The latest trade figures made for disappointing reading,” says Paul Hollingsworth, an economist at Capital Economics. “Admittedly, we wouldn’t read too much into the monthly widening in the overall trade deficit from £4.2bn in July to £5.6bn in August, as the data are very volatile and prone to revision.”

Nonetheless, now outside of the third quarter, it looks as if the summer’s poor trade balance numbers may have weighed on the economy during the recent three month period.

“The trade in goods volumes data, excluding erratic items and oil, saw a 0.1% quarterly fall in exports in the three months to August, compared to a 1% rise in imports (see Table), suggesting that net trade may have dragged on GDP in Q3, after boosting it by 0.4pp in Q2,” Hollingsworth adds.

But beyond the third quarter, the broader trend is more positive and the prospect remains that net trade could add meaningfully to growth over the coming quarters.

“Annual growth in export volumes was still a punchy 11% in August. And surveys suggest this strength should continue,” says Hollingsworth.

Capital Economics forecasts a gradual pickup in the UK’s net trade during the months ahead as exports continue to grow and negative real income growth crimps imports a touch.

"The deluge of official data for August provided some reassurances that the economy has not lost pace in
the third quarter and suggested that growth could even nudge up a touch," says Hollingsworth. "However, it also showed that the drop in the pound is still failing to boost net trade."