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Economy in Brief

U.K. Trade Deficit Shrinks As Exports Outpace Imports
by Robert Brusca  September 12, 2022

The goods trade deficit for the United Kingdom struck £19.36 billion from £22.85 billion in July compared to June. The deficit has been steady with an average of £18.5 billion over 12 months, £21.5 billion over six months and £21 billion over three months.

U.K. export growth has been volatile but has been strong. Nominal exports are growing at a 26.6% pace over 12 months, at a 58.1% annual rate over six months, and at a 23.9% annual rate over three months. Nominal imports are up by 29.4% over 12 months, slowed to a 10.7% pace over six months and slowed further to a 1.1% annual rate over three months.

Real flows monthly
Real trade flows for the U.K. demonstrate very different patterns from the nominal flows. Real exports still outperform imports in July, growing by 6.8% over June compared to a 3.7% drop in real imports. In June both real exports and real imports fell with real exports falling 9.3% month-to-month and real imports falling 3.2% month-to-month.

Real flows sequentially
The sequential trends for real exports and real imports show real exports persistently growing while real imports have turned to a pattern of declines. Real exports are up by 4.3% over 12 months, up at a 26% annual rate over six months and up at a 3.4% annual rate over three months. This compares to real imports that are up by 8.8% over 12 months and are stronger than real exports. But over six months real imports fall at a 13.6% annual rate, and they fall again over three months at a 16.4% annual rate.

Commodity composition of real trade flows
Real exports
Commodity categories tell a significant story about trends in the U.K. Exports show steady gains in capital goods with the 3.2% gain over 12 months, and an annual rate of growth at 14.5% growth over three months. Road vehicles show a steady to strong acceleration, rising at a 9.9% annual rate over 12 months, gaining at a 40.9% annual rate over six months and accelerating again to a 72.1% annual rate over three months. Basic materials fail to trend consistently but fall by 4.8% over 12 months and are declining at a 44.7% annual rate over three months. Foods, feeds, beverages & tobacco echo the trends for basic materials although they rise by 3.2% over 12 months and then fall at a 16.6% annual pace over three months. Both basic materials and foods, feeds, beverages & tobacco show solid gains over six months, then give those gains up over three months. Those gain keeps those flows from having any kind of a steady trend in play.

Real imports
On the import side, capital goods imports grow at a 12.7% pace over 12 months, which increases slightly to 14.2% at an annual rate over six months and then slips to a 6% annual rate decline over three months. Road vehicles show steady deceleration of imports, logging growth of 25% over 12 months, falling to a pace of 11.3% annualized over six months and logging a 39.5% annual rate decline over three months. Basic material imports are also in a fairly steady state of decline. They decline over all horizons, falling and 11.8% annual rate over 12 months, the slowing that drop only very slightly to a 10.5% annual rate of decline over six months and then accelerating sharply to a 61.3% annual rate decline over three months. Food, feeds, beverages & tobacco show declines over two of the three horizons; imports rise by 3.8% over 12 months, then slip at a 6.8% annual rate over six months and then decline at a more moderate 1.5% annual rate over three months.

Trends in perspective
What these trends clearly show is extremely weak import growth over three months; all three-month growth rates for the import categories are negative over three months. Overall imports decline over six months too although that decline is not as broad based. Over 12 months imports see a somewhat broader increase in real terms. By comparison, exports grow at a moderate 3.4% pace in real terms over three months with the declines in only two of the categories while over six months the export gain is solid at 26% with increases across all the commodity categories. The 12-month performance of exports is moderate with the growth rate of 4.3% and with a decline in only one of the featured categories.

World trade slows- and shrinks
This chart presents the year-over-year percent change in international shipping volumes as measured by the Baltic dry goods index. This clearly illustrates that global trade is slowing down. It also is a clear indicator that global economic growth is slowing down. Globally trade tends to expand faster than GDP growth so this decline in the Baltic index is telling. There was a sharp increase in global trade in the wake of the COVID-created business cycle (the U.S. cycle is presented on this chart). But after creating a blowout for trade volume, trade has decelerated sharply and now we are seeing a decline in trade volume year-over-year.

In this environment, nominal flows are the least instructive because oil prices have surged and now that they are declining; they are going to be dominating the nominal growth rates along with other commodity prices. However, the real growth rates in the U.K. point to a slowdown in U.K. growth and in domestic demand. The U.K. seems to be experiencing the same thing that we're seeing in the U.S. and in Europe with G7 and European Monetary Union economies slowing down. Europe is going to see some special problems with the energy pipeline from Russia shuttered; this is already having some dramatic negative effects in Germany.

Ukraine war front
While many in the West are cheering the success of Ukraine with its latest offensive in its war, it's also clear that this creates some risks as it rubs defeat into the nose of Russia. That’s largely because western economies have been arming Ukraine with better- and better-quality weapons. The degree of uncertainty in Europe because of the Russian invasion cannot be exaggerated. Its ultimate impact on the business cycle is still hard to know. Although if Russia keeps the pipeline closed, it's going to have a dramatic crimping effect on growth in Europe; of course, that will have blowback effects on the U.K. since it trades a great deal with other European economies.

Change afoot...
The U.K. is also undergoing a changing of the guard as King Charles has been crowned in the aftermath of his mother’s long reign and death. Queen Elizabeth II was an amazing figure who represented her nation globally with very widespread respect. Here's a leader who will be missed. It will be up to King Charles now to manage the pressing issues left to the Royals. The U.K. also has a new Prime Minister and has adopted new energy policies to insulate its economy from the energy shortages. Only time will tell if it has offered support that will prove to be too broad. In several ways, the U.K. economic and political cycles are turning. The Bank of England is fighting a virulent inflation. For now, the economy is growing, but the trade statistics suggests that domestic demand is fading fast. The new Q2 GDP reading is weak. And Europe, an important U.K. market, is going to be under severe pressure; that will be another heavy load to bear.

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