From the TUC

The Trade Deficit – why today’s figures are so worrying

09 Aug 2012, by Guest in Economics

For a Government committed to ‘export-led growth’ today’s dreadful trade figures are very bad news indeed.

As the Guardian reports:

Britain’s trade deficit ballooned to its highest level since modern records began in June following a sharp drop in exports – with particularly weak demand from countries outside the crisis-ridden eurozone.

Hopes of a rebalancing of the economy towards overseas sales were dented with the release of official figures showing the gap between imports and exports widened from £2.7bn to £4.4bn.

Although Britain’s export performance has been hampered by the prolonged crisis in the eurozone, the 4.6% drop in the value of overseas sales in June was largely the result of weaker demand from countries outside the European Union. Exports to the US, where the economy has been slowing down in recent months, fell sharply.

The Office for National Statistics said the UK trade deficit was the largest since comparable records began in 1997 and were made up of a £10.1bn in trade in goods, offset by a £5.8bn surplus in services.

What makes the picture even more worrying s that the UK trade deficit is widening at a time of falling GDP.

During the first recession of the current slump, the trade deficit narrowed considerably providing a much need boost to GDP. This time round, in the double-dip, the trade deficit is widening (note both the charts in this post are taken from the Q1 2012 National Accounts data and hence only go up to Q1, more data will available at the end of the month):

To understand how this occurred its worth looking imports and exports separately. As the chart below shows (with them both rebased to 100 for ease of understanding) both imports and exports fell sharply in 2008/09 but imports fell by a lot more. This led to some improvement in the balance.

Today’s data shows that, this time around, something different is happening. On a balance of payments basis exports fell by 1.4% in Q2 2012 over Q2 2011 whilst imports rose by 2.2% over the same period.

Yesterday’s Bank of England Inflation Report made clear that the domestic economy faces a triple squeeze of poor living standards, constrained credit and fiscal austerity. In other words domestic demand looks set to remain weak. The one silver lining of weak domestic demand in 2008/09 was that is accompanied by an improvement in trade performance. This time around there is no evidence that this is happening.

One Response to The Trade Deficit – why today’s figures are so worrying

  1. Should we ‘Rebalance the economy’ or ‘Reform British Capitalism’? | Liberal Conspiracy
    Aug 20th 2012, 5:10 pm

    […] if the private sector is determined to run a surplus then (in the absence of strong export growth (which isn’t happening in the UK)) then the consequence will be a public sector […]