9 Sep 2010

Britain’s trade deficit hits all-time high

Britain’s trade deficit hit an all time high in July, undermining hopes that the country will switch from consumer spending growth and move towards exports, writes Economics Producer Neil Macdonald.

stageBritain's trade deficit hits all-time high (Reuters)

Vicky Redwood at Capital Economics said the figures were “dreadful”, and raised doubts about whether the UK can rely on exports to drive the economy forward as government and debt-funded consumer spending weaken in future months.

The country ran a deficit on its trade in goods of £8.7bn – compared to a £7.5bn deficit in June – as exports shrank and imports grew. The UK has been running a growing trade deficit for more than a decade, raising concerns about the long term competitiveness of the British economy.

The UK did better on its trade in services, where the country ran a surplus of £3.7bn – but that still means the combined deficit in goods and services is £4.9bn – up by a billion from the previous month, according to the Office for National Statistics figures.

The figures disappointed those economists who have been expecting to see an improvement in the UK trade position because of the devaluation of the pound at the end of 2008. As sterling fell in value against the dollar and the euro, British exports should cost less, making them more competitive abroad.

But so far, the improvement in Britain’s trade has been slow.

Other economists are more optimistic about Britain’s trade deficit, pointing out that July was affected by special factors.

A number of North Sea oil rigs were closed for maintainence, leading to a fall in oil exports and a rise in oil imports. That effect should fade away as the rigs come back online. However, the figures show that even with the oil effect stripped out, the UK trade deficit has widened.

Britain can 'export out of the recession'

"It is worse than expected but one figure is always susceptible to noise, and there are always specific factors - if you look beyond this one figure at the longer trend in 2010, we are seeing exports improve," David Kern, chief economist at the British Chambers of Commerce (BCC) told Channel 4 News.

"They are showing good growth and it is very important to sustain that as, given the impact of the deficit-cutting programme on domestic demand, our economic recovery will rely on net exports and things are doing reasonably well.

"Historically we have had a trade deficit but there have been welcome signs that this is shrinking over this year and last year. It has been a step for the better, but it is not enough to make the deficit a surplus. This can be done, but it won't be easy, and will need international co-operation.

"We should all be concentrating all of our efforts to make sure we can export our way out of the recession - it is not guaranteed, but it can happen."