UK trade deficit narrows to an 18-month low

Trade balance data for July has revealed this morning that the UK trade deficit has narrowed to a February 2011 low of 7.1B. This was lower than the 8.9B deficit that was anticipated and significantly lower than the 10.1B deficit shown in August. 

At 9.0%, overall export sales growth was at its highest level since 1998. Sales of goods outside the eurozone grew by 11%, while somewhat surprisingly, sale of goods to the eurozone even grew by almost 8.0%. More positive news for the economy, then, and it certainly takes some of the considerable pressure off the UK government.

It is encouraging to see UK businesses respond to the challenges facing them, in the form of low confidence and deteriorating economic conditions in the eurozone, by diversifying their global trade relations. Increased take-up from the US, Asia (especially India) and South Africa all contributed to this morning’s improved figure. Oil exports to the eurozone was also a key factor in helping the July trade balance bounce back from June’s disappointing showing, which was the worst since modern records began 15 years ago.

Once again this points to a rebound for UK GDP in the third quarter. Awful trade balance figures were a real drag on growth last quarter, which unless we see another dramatic reversal in August and September, will not be the case in Q3. It goes without saying that this figure does not change a very uncertain outlook for UK exporters. The flow of bad news out of the eurozone has been stemmed somewhat over the summer but for as long as the region’s economy contracts, a cloud will remain over many UK businesses. Nonetheless, this is again good news for the UK and no doubt Chancellor George Osborne will sleep a little easier tonight.

Richard Driver

Currency Analyst

Caxton FX

Positive retail sales data pushes sterling higher

Sterling found a boost for the second day after reports showed that British retail sales accelerated in July and the Public Sector Borrowing Requirement figure came in lower than expected.


UK retail sales figures in July came in at 1.1%, considerably higher than the expected number of 0.4%. Likewise, the government’s borrowing requirement came in at £3.2 billion, £2 billion lower than expected. Other data out today showed an increase in the number of unemployment claims in the US.

The pounds response to the positive data was instant, jumping almost a cent against both the euro and the dollar. The UK currency is hovering near its high of the day against the dollar, but has dropped back to sit in the mid 1.2150s against the euro following the latter’s rally against the greenback.

UK trade deficit beats expectations, pushing sterling up

Data this morning has shown that the UK trade deficit narrowed substantially in February following the disappointment of January’s figure.

A deficit of £6.2 billion was recorded for the month, some way from the median forecasts, which had called for a more moderate narrowing of the deficit to £7.3 billion. The last time the monthly deficit was at this level was in August 2009.The data should raise expectations that the UK can bring its debts under control. It also reveals the positive impact that the weak UK currency has had in lifting demand for British exports.

Duncan Higgins, senior analyst at Caxton FX says, “Sterling’s lowly rate is finally beginning to pay dividends. Its broad undervaluation in recent months has increased the competitiveness of UK exports, supporting a slight rebalancing of the deficit.”

“Certainly the data is supportive, and marks a positive step in reducing overall debt, but the road ahead will remain uneven. The incoming government, be it a single party or a coalition, needs to detail a precise strategy for financing the huge debt burden that lies on the UK economy. A steady appreciation of the pound will have to wait until the market is satisfied that such a plan has been clearly outlined,” continued Higgins.

Improved sentiment in the wake of the figures has given sterling a slight boost, bringing it off this morning’s lows. The pound is now trading comfortably back above €1.13, though remains some way from its seven-week high hit at the end of last week. It is also approaching 1.54 against the dollar, up fractionally on the day.

Pound continues to strengthen against the euro

The pound continued its recent upward trend against the single currency yesterday as investors were reassured by better than expected earnings at Barclays bank. Shares in the bank rose by more than 10% in response to the news, as there was a realisation that the bank did relatively well considering the economic turbulence of 2008. Indeed, sterling’s gains came despite Labour’s school secretary Ed Balls warning that the world is facing up to its worst recession in more than a century.

The Royal Institute of Chartered Surveyors reported overnight that interest in the housing market continued to pick up in January, although the average number of transactions showed little change, as the housing market remains sluggish in tight credit conditions. The UK releases its trade balance data this morning, whilst there are no major announcements due in the eurozone.