GB: Merchandise Trade

Fri Nov 06 03:30:00 CST 2015

Consensus Actual Previous Revised
Level Stg-10.6B Stg-9.35B Stg-11.15B Stg-10.79B
Imports-M/M -2.5% -0.7% -1.6%
Imports-Y/Y -5.4% 3.6% 2.1%
Exports-M/M 2.4% 3.5% 3.2%
Exports-Y/Y -4.0% 2.1% 1.5%

The shortfall on global goods trade narrowed by more than expected in September. At Stg9.35 billion the deficit was below a downwardly revised Stg10.79 billion in August and the smallest in three months.

There was also better news on the underlying gap which excludes oil and other erratic items. This shrank from Stg9.37 billion to Stg8.56 billion, its best outturn since May.

The headline improvement was due to a combination of stronger exports, up 2.4 percent on the month mainly thanks to chemicals, and weaker imports which were down 2.5 percent. Geographically, the reduction in the red ink was wholly attributable to net trade with non-EU countries. The deficit here fell from Stg3.8 billion to Stg2.1 billion. By contrast, the shortfall with the rest of the EU widened from Stg6.9 billion to Stg7.3 billion.

Despite September's much needed improvement, the total goods deficit in the third quarter still rose nearly Stg6 billion to 32.18 billion. Over the same period the underlying shortfall widened from Stg25.38 billion to Stg28.11 billion. Core export volumes last quarter were up 2.6 percent versus the second quarter but this was swamped by a 9.3 percent spurt in real imports.

As such underlying trends continue to move in the wrong direction suggesting that, at current levels, the pound is still highly vulnerable to a prolonged period of record low UK interest rates.

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.