GB: Merchandise Trade

Thu Apr 09 03:30:00 CDT 2015

Consensus Actual Previous Revised
Level Stg-9.0B Stg-10.34B Stg-8.41B Stg-9.17B
Imports-M/M 0.8% -7.2% -5.2%
Imports-Y/Y -1.6% -7.1% -5.0%
Exports-M/M -3.7% -4.1% -4.3%
Exports-Y/Y -4.1% 0.1% -0.1%

Expectations that the shortfall on global goods trade narrowed in February proved wildly optimistic. At Stg10.34 billion the deficit moved back into double digits for the first time since last September and that after January's red ink had been revised substantially larger. The underlying shortfall which excludes oil and other erratic items climbed from Stg8.35 billion to Stg9.12 billion.

The latest headline deterioration reflected mainly a 3.7 percent monthly drop in exports although a 0.8 percent rise in imports did not help either. Worryingly, the decline in the former followed an even steeper 4.3 percent slump at the start of the year and means that the level of exports is now at its lowest mark since September 2010. Weakness was particularly marked in manufactures and the overall drop would have been sharper still but for a pick-up in fuel exports.

Net trade with the rest of the EU actually posted a small improvement (Stg-7.1 billion after Stg-7.2) but the shortfall with the rest of the world increased by more than Stg1 billion to Stg3.2 billion.

For now, despite the disappointing nominal figures, underlying volume trends actually remain positive. Hence, over the last three months, core export volumes rose 2.4 percent compared with a 1.7 percent increase in imports. However, underlying export growth is clearly slowing in contrast to its import counterpart and future developments here are unlikely to bode well for the pound. While financial markets are prepared to attribute the red ink on net trade to the relative strength of UK domestic demand the exchange rate can probably hold its own. However the red ink is large enough to suggest that a potentially sizeable correction is now well overdue.

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.