UK Export Trade, Economy, Surprise on the Upside in July but How Long Can it Last?

-UK exports boom in July while economic growth picks up too.

-Trade deficit falls to lowest level since April 2011 on export surge.

-But more data is needed before GDP implications become known.

© Winterbilder, Adobe Stock

The UK export sector boomed in July and during the recent quarter, according to Office for National Statistics data released Monday, helping lift economic growth to its highest level in nearly a year but the jury is still deliberating on the question of how long this performance can go on for.

The UK trade in goods deficit shrank to just -£9.97 bn during July, down from -£10.67 bn previously, when markets had looked for an increase to -£11.70 bn. This is the lowest monthly goods deficit since February and the second lowest since November 2016.

Meanwhile, the UK's trade in services surplus scored its fifth consecutive increase when it rose to £9.86 bn. Combining the goods deficit with this services surplus still produces an overall trade deficit for the month of July, although a significantly reduced one. 

The UK's total trade deficit was just -£111 million during July, its lowest since April 2011. This is a significant win for the UK economy. And for the quarter ending in July, the total trade deficit fell to just -£3.35 bn, also its lowest level since the quarter ending in April 2011. 

"Remarkably, this is the fourth best monthly trade balance figure in the past 20 years with the real encouragement being that it was caused by a jump in exports rather than purely slower imports," says James Knightley, chief international economist at ING Group. 

Trade balance data measures the difference in value between a nation's imports and its exports. Currency markets care about it because the data provides insight into supply and demand of a currency in the "real economy", while also giving a steer on the likely pace of GDP growth in a given period.

A narrowing trade deficit suggests either that exports and their associated demand for a currency are rising, or that imports and their associated supply of a currency on global markets are falling. Both are typically good for a currency while a steadily narrowing trade surplus, or a widening deficit, is a negative influence.

The size and trajectory of a trade surplus or deficit is important for economic growth because imports are a subtraction in the calculation of GDP, while exports represent a credit to the value of economic output. As a result, rising exports and, or, falling imports can help boost the economy.

July's trade performance may have done just that, although more complete data due out at a later date will be required before this can be said for certain.  

"The volumes data suggest that net trade boosted GDP growth by 0.4pps in the three months to July after knocking 0.6pps off quarterly growth in Q2," says Andrew Wishart, a UK economist at Capital Economics. "Note, though, that the majority of the improvement reflected a rise in net exports of erratic items such as non-monetary gold. As a result, if sustained in Q3 as a whole, the boost to net trade would be offset in the quarterly GDP figures by an equivalent fall in the net acquisition of valuables component of GDP."

UK GDP grew by 0.3% during July according to other data released by the ONS Monday, up from 0.1% back in June, when markets had looked for growth of just 0.2%. This was enough to push the quarterly growth rate up from 0.4% to 0.6% for the three months to the end of July, which is its fastest pace since the quarter ending in August 2017.

The services and construction industries were the standout performers during period, accounting for much of the expansion, while the industrial sector weighed on growth according to the Office for National Statistics (ONS) figures.

Notably from a trade perspective, the manufacturing industry also appeared sluggish in July, with output contracting by -0.2% when markets had looked for it to grow by 0.2%. However, the ONS says this was due to a 7.5% fall in the value of pharmaceuticals output, which masked an otherwise strong month for eight out of 13 subsectors.

"The drop in the manufacturing PMI to its lowest level since the Brexit vote in August suggests that production likely will flatline over the coming months," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "July’s data suggest that the risks to the MPC’s forecast for another 0.4% quarter-on-quarter rise in GDP growth in Q3 lie to the upside. But the fall in the confidence components of the Markit/CIPS and Lloyds surveys, the slowdown in global manufacturing, and the prospect of a further escalation of political tensions in the U.K. suggest that the economy is heading for a weak end to 2018."

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

Survey measures of manufacturing activity have been running high after the cheaper currency helped drive a surge in ONS-reported activity last year that saw the sector enjoy its longest run of growth since 1988.

However, imports have continued to increase during this time, eliminating what might otherwise have been a sustained source of support for the economy. Recent data also suggests the manufacturing boost may now be waning too.

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