The shortfall on global trade in goods widened out from a smaller revised Stg8.51 billion in June to a much larger than expected Stg11.08 billion in July, its worst performance since July 2014. Excluding oil and other erratic items the red ink was up from Stg8.47 billion to Stg10.76 billion
The sizeable headline deterioration reflected a 9.2 percent monthly slump in exports (mainly chemicals and finished manufactured goods), their steepest decline since July 2006 and enough to reduce their annual growth from 5.0 percent to minus 5.4 percent. By contrast, imports were up 0.8 percent versus June but even they were 4.2 percent lower on the year.
Regionally the damage was done mainly by trade with non-EU countries where the balance worsened from a deficit of Stg1.5 billion to a shortfall of Stg3.5 billion. However, the red ink with other EU countries also climbed Stg0.6 billion to Stg7.6 billion.
Despite July's setback, underlying volume trends were moderately positive. Hence, excluding oil and erratics, exports in the latest three months were up 0.9 percent compared with a 0.8 percent fall in imports. Moreover, revisions to the nominal data mean that total net exports could have boosted second quarter real GDP by somewhat more than the 1.0 percentage points previously estimated.
Nonetheless, the UK trade gap is showing no signs of narrowing and it remains a major threat to the pound over the medium-longer term. Further comments from BoE officials to the effect that sterling is significantly overvalued are only to be expected.
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.