UK posts largest trade deficit in 15 years

10th August 2012

The UK's deficit on seasonally adjusted trade in goods and services was £4.3 billion in June, compared with a deficit of £2.7bn in May. The deficit on trade in goods was £10.1 billion. The surplus on trade in services was estimated at £5.8 billion. A trade deficit represents a negative balance of trade in which a country's imports exceed its exports.  

The dismal report comes of the heels of comments from the Bank of England Wednesday that the pound's appreciation over the past year may retard exports at a time when slowing global expansion is undercutting demand.

So why is the UK's trade deficit bad? After all, economic theory dictates that a trade deficit is not necessarily a bad situation because it often corrects itself over time. Well, according to this piece by the BBC, here's why:

First, it represents the biggest goods trade deficit since September 2011. Second, it's the biggest non-EU goods trade deficit since September 2011 (the deficit with non-EU nations rose to £5.2bn in June from £3.9bn in May.) And finally, and most importantly, it's the biggest total goods and services trade deficit since modern records began in 1997.

The Office for National Statistics (ONS) did note, however, that the moving of the late May 2012 bank holiday to June 2012 and the additional bank holiday for the Queen's Diamond Jubilee are likely to have affected the month on month movements  in the trade figures in these periods.

Nonetheless, economists and analysts greeted the data with horror.

Vicky Redwood, an analyst at Capital Economics, called the latest trade figures "pretty dreadful."

She added: "Although it is tempting to blame the euro-zone crisis, the deterioration was driven by a widening in the deficit with non-EU countries. Exports to the US fell particularly sharply."

Alan Clarke, economist at Scotia Capital, said it's very hard to take anything positive from this data, "it's a big downward surprise."

"Against the backdrop where our main trading partners, Germany and continental Europe, are very weak, this is no surprise, and the scope for improvement anytime soon is limited."

David Tinsley of BNP Paribas, meanwhile, is anticipating very significant jubilee effects: "There's clearly been a big impact from the low number of working days which has directly effecting shipments, so it's not that surprising."

Overall, David Kern, chief economist at the British Chambers of Commerce (BCC) says the rebalancing of the UK economy towards exports is still too slow.

"British exporters have untapped potential to expand, but they need more government support to help them compete globally and diversify towards growing markets outside the EU. We need firmer action in key areas such as trade finance, promotion and insurance. More infrastructure spending and the early creation of a business bank would make a major contribution towards stronger growth in UK exports."

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