The global shortfall on goods trade unexpectedly narrowed in May, albeit from a significantly larger revised deficit in April. At Stg8.00 billion the red ink in mid-quarter was sharply down versus its Stg9.39 billion April outturn and equalled the smallest print since June 2013.
However, the headline improvement was in large part due to a stronger performance by the more volatile sectors as, excluding oil and other erratic items, the deficit narrowed by only Stg0.23 billion to Stg7.50 billion, although this too constituted a 2-year low.
In fact the reduction in the overall shortfall was wholly attributable to weaker imports which fell a sizeable 4.1 percent on the month. Exports dipped 0.1 percent and were down some 2.3 percent excluding oil and other erratic items. The deficit with the rest of the EU stood at Stg6.4 billion versus Stg7.0 billion last time and with the rest of the world at Stg1.6 billion after Stg2.4 billion.
Still, the real trade balance also posted a useful improvement over the second quarter as a whole as export volumes rose a quarterly 2.6 percent and imports slipped 0.2 percent. On the same basis core exports were 3.0 percent stronger while imports declined 0.2 percent. As a result, the signs are that having subtracted from economic growth in January-March net exports probably boosted second quarter real GDP.
As such today's figures should be a small plus for the pound. Nonetheless, the trade deficit remains worryingly large and reflects an over-reliance on household consumption to keep the UK recovery alive. This is not sustainable over the longer run.
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.