The global deficit on trade in goods widened out to a much larger than expected Stg11.83 billion in October. Although the September shortfall was revised down to Stg8.80 billion, the latest print was still a 3-month high and included a Stg2 billion jump in the underlying red ink to Stg10.89 billion.
The headline deterioration was mainly attributable to higher imports which surged a monthly 7.0 percent on the back of strong demand for finished manufactures, notably autos. However a near-3 percent drop in exports also helped to push the balance further into the red.
Regionally the damage was mostly caused by a Stg2.0 billion worsening to Stg3.7 billion in the deficit with non-EU countries. However, at Stg8.1 billion, the shortfall with other EU members was also up a full Stg1.0 billion.
Although the deterioration in volumes was nothing like as marked as in nominal net exports, the October data underline the damage being inflicted on the UK economy by a combination of a (still) consumer led recovery and an overvalued pound. The worsening position has already subtracted a record 1.5 percentage points off third quarter GDP growth and today's report hardly bodes well for the current period. Despite its recent slippage, at current levels the pound looks very vulnerable over the medium-term.
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.