UK Trade Deficit Widens in Final Quarter as Oil Price Rise Sends Imports Surging

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Friday’s data comes closely on the heels of fourth quarter GDP numbers, which showed the UK economy further regaining lost momentum, with quarterly growth rising to 0.5%.

Britain’s trade in goods and services deficit with the rest of the world widened sharply in December and for the fourth quarter overall, according to Office for National Statistics figures released Friday.

For the December month alone, the deficit rose t0 -£4.9 billion, from an upwardly revised -£3.7 billion in November. And for the three months to the end of December the deficit widened by £3.8 billion to -£10.8 billion.

This means that, during the fourth quarter, the UK imported £10.8 billion more goods and services than it exported.

“The widening of the trade in goods deficit was due mainly to a 3.8% (£2.1 billion) increase in imports from non-EU countries, alongside decreases in exports to the EU, in the three months to December 2017,” says the ONS.

The figures are a disappointment for UK economy watchers as they raise concerns that the boost to growth coming from the export sector is in danger of disappearing.

“The headline trade in goods volumes figures suggest that net trade provided a drag on GDP of about 0.7pp, after making no contribution in Q3,” says Paul Hollingsworth, a senior UK economist at Capital Economics.

UK manufacturing and export goods sectors have been a relative bright spot for the UK economy ever since the referendum of 2016, thanks largely to a cheaper currency, which has made British goods cheaper for international customers to buy.

This cheaper currency has helped drive a surge in UK manufacturing activity that saw the sector enjoy its longest run of growth since 1988 in 2017, although a 2017 increase in global economic growth has also played an increasing role in recent months.

However, imports have continued to increase during this time and, more recently, the Pound Sterling has seen a sharp recovery against the US Dollar and, to a lesser extent, the Euro as well.

“However, we would strongly advise against reading too much into these figures,” says Hollingsworth. “ with the UK being a net oil importer, the sharp rise in oil prices distorted the trade deficit.”

Prices of Brent crude oil, which is the main European benchmark, have risen by some 30% over the last six months to trade at multi-year highs of $65 per barrel and more. This has pushed up the monetary value of the UK’s energy imports and widened the trade deficit.

“Note too that excluding oil and erratic items, growth in export volumes exceeded growth in imports in Q4, suggesting that the underlying picture for net trade is much better than these figures suggest,” adds Hollingsworth.

“As a result, December’s figures don’t suggest the boost to manufacturing and net trade has now run its course.”

Friday’s data comes closely on the heels of fourth quarter GDP numbers, which showed the economy growing 0.5%, up from the 0.4% seen in the third quarter. For the year overall, GDP growth was 1.8%, down by a fraction from the 1.9% seen in 2016. 

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