The red ink on global trade in goods shrank unexpectedly sharply at the start of the year. At Stg8.41 billion January's deficit was down more than Stg1.5 billion from a slightly smaller revised shortfall in December and at its lowest level since March 2014.
The improvement was largely attributable to the slide in energy prices which saw oil imports drop Stg1.2 billion on the month and the oil deficit shrink from Stg0.99 billion to Stg0.57 billion. Overall imports fell fully 7.2 percent on the month and more than reversed December's 3.5 percent spurt. However, exports were also soft, declining a sizeable 4.1 percent after a 2.5 percent advance last time.
The bilateral red ink with the rest of the EU was little changed at Stg6.7 billion but the shortfall with the rest of the world narrowed from Stg3.1 billion in December to Stg1.7 billion.
Irrespective of the boost afforded the headline balance by smaller energy bills, underlying trade developments were also positive in January. Hence, over the last three months, core export volumes were up 3.4 percent versus an increase of just 0.8 percent in core imports. Excluding oil and other erratic items, the red ink in January was Stg7.72 billion, still disappointingly large but also the smallest since June 2013. The rising pound may have something to say about this over coming months but for now the FX market should view today's data positively.
Merchandise trade balance measures the difference between imports and exports of both tangible goods and services. The level of the international trade balance, as well as changes in exports and imports, indicate trends in foreign trade. In the UK the main market focus is the global goods balance as this is seen as a better guide to the economy's competitiveness.
Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. While these trade figures can directly impact all financial markets, they primarily affect currency values in foreign exchange markets.
Imports indicate demand for foreign goods and services in the UK. Exports show the demand for UK goods in countries overseas. The pound sterling can be particularly sensitive to changes in the chronic trade deficit run by the United Kingdom, since the trade imbalance creates greater demand for foreign currencies. The bond market is also sensitive to the risk of importing inflation. This report gives a breakdown of trade with major countries as well, so it can be instructive for investors who are interested in diversifying globally. For example, a trend of accelerating exports to a particular country might signal economic strength and investment opportunities in that country.
The UK's trade balance is particularly susceptible to swings in the oil account and so within the overall goods balance, financial markets will normally focus on the balance excluding oil and other erratic items.