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Economy in Brief

U.K. Trade Gap Widens as Sterling Gains Strength
by Robert Brusca  September 9, 2014

U.K. exports and imports fell in June. Exports fell by 1.6%, following a 0.1% decline in May. Imports fell by 0.4%, following a 0.9% rise in May. Over 12 months both exports and imports are falling with exports falling faster at a pace of -12.7% compared to -6.3% for imports.

U.K. exports are laboring under the impact of a strengthening pound sterling. The real effective exchange rate is up by 3.4% over six months and 0.7% over 12 months. That exchange rate metric assesses the average rise change in sterling's value across trade partners weighted for the importance of those bilateral trade flows. The end result is also adjusted to reflect inflation differences between the U.K. and its respective trade partners. The rise in the inflation-adjusted exchange rate indicates a loss in competitiveness for U.K. exporters. At the same time there has been weakening demand in the euro area which comprises nearly 50% of U.K. trade.

U.K. exports are showing declines over three months in basic materials and other exports. Basic materials exports are falling at 8.6% annual rate; other exports are falling at a 22% annual rate. Exports of food, feed, beverages and tobacco are up at a 3.8% pace over three months, capital goods exports are up at a 0.6% pace and road vehicles exports are rising at a 0.3% pace. Over six months, the declining categories include other exports, basic materials and capital goods. Over 12 months, all the sectors are showing declines except road vehicles exports which are up by 3.4%. The export group shows us that declines are becoming a little bit less common across categories over three months compared longer horizons; however, over three months, the overall decline in exports is faster than over six months and 12 months. Exports from the U.K. are not going to be helped by the strengthening of the sterling exchange rate.

Imports show a picture of an improving economy. Over 12 months imports are falling at 6.3% annual rate and over six months they are declining at a 0.1% annual rate, but over three months imports are rising at a 1.7% annual rate. That is no blockbuster rise; however, it shows a steady turnaround from the year ago pace of imports. Over three months all import categories are increasing except for the other imports category. Over six months, all import categories are declining except for capital goods where imports are rising a 2.6% pace and road vehicles where imports are soaring at a 31.5% annual rate. Over 12 months, all categories are declining except road vehicles which, again, are relatively strong at a 14.6% annual rate. Imports show the impact of a steadily improving economy and possibly also show the impact of greater export competitiveness by foreign producers given the rise in the sterling.

The U.K. economy has been improving and Bank of England Governor Mark Carney is now looking to the potential for rates to rise in the spring. However, there has been some recent dissent on the BOE monetary policy committee, as two members want rates to be raised more immediately. The U.K. economy does appear to be strengthening; the rising exchange rate may take some of the steam out of a gathering pace. This is going to be something to watch in the coming months, especially as the European Central Bank is expected to keep policy weak while the BOE is looking to implement a firmer policy ahead.

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