UK Trade Deficit Ceases Progress Toward Lower Deficits

UK exports and imports each backtracked slightly in April after solid to strong gains in March. The upshot is that the flirtation with progress in deficit reduction has ground to halt and commenced a backtracking over the last two months. This backtracking could be reversed. This episode could be a pause in the process of ongoing deficit reduction or it could be the start of some real backtracking. For now it's too soon to tell. So we flash yellow cautionary lights instead of red ones.

For now the trends in the UK data are still beneficial ones for the prospect of further deficit reduction. Imports are still growing solidly but steadily with growth rates of 10% to 13% over various horizons from one-year to 3-months. For exports the growth rates range from 13% to nearly 40% and the highest growth rates are more recent ones. That suggests that export growth is still on a strong track while imports are only steady. One worry of course is that with the Euro weakened and the German export machine turned on UK exports could suffer stiffer competition. But the pound has weakened even more than the euro. Moreover, Germany has done nothing to pump up domestic demand and the rest of Europe is under a cloud of austerity. Germany itself is considering further austerity moves.

In looking at the UK situation we have three facts to consider. One is that the trade deficit reduction process has been under way since that reduction has been somewhat effective. The second, is that the conditions that made that progress a reality seem to still be in evidence as export momentum seems stronger than import momentum over the more recent periods. The pound sterling has fallen in value, augmenting UK competitiveness even Vs the euro-area. The third point looks ahead: the macroeconomic facts of life seem to put the UK's back to the wall. Although it can still do well in exporting to the US which is growing solidly, the UK trade balance with the EMU group seems more likely to pose challenges. EMU sends 12% of its exports to the UK. It's an important market for EMU just as EMU is important to the UK. Moreover, conditions in EMU will affect the UK. The broad euro real effective exchange rate (trade-weighted and inflation adjusted) has gone from being 20% above its estimated parity rate to near parity in two years' time. There should be repercussions on trade flows from this in trade with the Zone's key trading partners. But during this period sterling has fallen sharply even against the Euro. The UK problem in penetrating the e-Zone will not be price competitiveness but it will be euro-demand. EMU growth is being stimulated by its trade flows riding the back of its weak exchange rate, not stimulated from within by domestic demand. In fact the UK deficit with EU countries widened to £3.3 billion in April, compared with a deficit of £3.2 billion in March. Exports rose by £0.1 billion and imports rose by £0.2 billion. A weak European consumer - even in the Europe's strongest economy, Germany - is the hurdle faced by UK exporters. Europe simply is not a strong market even although UK exports can profitably sell there.

UK Trade trends for goods
	m/m%		% Saar
	Apr-10	Mar-10	3M	6M	12M
Balance*	- £    7.28	- £    7.26	- £    6.94	- £    7.15	- £    6.90
Exports of Goods
All Exp	-0.6%	1.0%	38.9%	13.3%	14.9%
Capital gds	-1.3%	1.2%	3.1%	-3.3%	2.8%
Road Vehicles	11.5%	-3.2%	59.9%	22.5%	77.3%
Basic Materials	-4.3%	18.8%	577.7%	52.5%	35.4%
Food Feed Bev & Tbco	-0.5%	1.2%	32.8%	10.6%	5.8%
Other Exports	-1.7%	0.8%	36.3%	14.1%	12.2%
Imports of Goods
All IMP	-0.4%	4.3%	12.9%	10.5%	11.6%
Capital gds	2.6%	-0.1%	5.5%	15.8%	7.2%
Road Vehicles	1.0%	5.1%	23.0%	24.0%	60.0%
Basic Materials	-5.7%	6.1%	-4.7%	23.0%	19.7%
Food Feed Bev & Tbco	1.9%	1.7%	22.1%	-0.5%	-1.0%
Other Imports	-1.3%	5.3%	12.4%	8.9%	9.2%
*Stg Blns; mo or period average. All data are seasonally adjusted