GB: Merchandise Trade

Fri Oct 09 03:30:00 CDT 2015

Consensus Actual Previous Revised
Level Stg-10.0B Stg-11.15B Stg-11.08B Stg-12.20B
Imports-M/M -0.7% 0.8% 2.3%
Imports-Y/Y 3.6% -4.2% -1.0%
Exports-M/M 3.5% -9.2% -12.8%
Exports-Y/Y 2.1% -5.4% -6.4%

The deficit on global trade in goods shrank in August but only from a sharply higher revised level in July. At Stg11.15 billion, the latest shortfall was much larger than anticipated and, following Stg12.20 billion of red ink at the start of the quarter, will fuel worries about the overvaluation of the pound.

To make matters worse, the underlying trade gap which excludes oil and other erratic items narrowed by only Stg0.7 billion to Stg9.63 billion, its second worst reading in the last five months.

Total exports were up 3.5 percent on the month but this made only a limited impression on July's 12.8 percent slump. By contrast, imports were down 0.7 percent after a 2.3 percent gain last time.

The headline improvement came courtesy of a stronger net trade position with non-EU countries and the deficit here fell from Stg4.8 billion to Stg3.8 billion. The shortfall with the rest of the EU was unchanged at Stg7.4 billion.

Today's report increases the likelihood of net exports being a drag on real GDP growth in the third quarter. Having added fully 1.4 percentage points in the previous period this should be of little surprise. Nonetheless, with the cumulative July/August deficit already 89 percent of the entire second quarter outturn, the trend in the UK external accounts leaves much to be desired.

That said, the underlying position is quite complicated as core export volumes in the last three months grew a healthy 5.7 percent. The problem is with the other side of the balance sheet as similarly measured imports expanded almost twice as quickly (9.4 percent).

The bottom line is that the UK economic recovery still lacks balance with growth far too dependent upon household spending. To this end, a near-term hike in Bank Rate that puts renewed upward pressure on the exchange rate could stoke up serious problems with the overall current account deficit further down the road.

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.