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Issue #591

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2014 Media Kit

​Narrowing trade gap fuels British recovery hopes

By: | at 04:23 PM | International Trade  

Britain’s trade deficit narrowed sharply in June while second quarter construction output grew faster than an official estimate, adding to signs the country’s economic recovery is moving onto a more sustainable footing.

The trade gap almost halved to 1.5 billion pounds, helped by a surge in exports to countries outside the European Union. The deficit in goods alone shrank to 8.1 billion pounds from 8.7 billion, its best reading in almost a year.

Goods exports to China hit a record high in June and rose more than 20 percent in the second quarter compared with the same period last year.

In contrast, Britain’s exports to Germany fell 9 percent in the second quarter, while imports, particularly of pharmaceuticals, rose strongly.

“The data suggest that the weakness in Europe continues to be a drag on UK exports, although a pick-up in demand from its other trading partners sheltered UK exports from the full impact of this slowdown,” said Blerina Uruci, UK economist at Barclays Capital.

Since the financial crisis, policymakers have stressed the need to rebalance Britain’s economy away from domestic consumption and towards exports. Progress in recent years has been slow, despite a 20 percent fall in the value of sterling since 2008.

The trade deficit lopped 0.1 percentage points off GDP growth in the first quarter but analysts are hopeful that trade may make a positive contribution to GDP growth in the second quarter.

Such a reading would be a relief to the government which has come under fire for mortgage subsidy schemes that critics say will exacerbate Britain’s reliance on debt-driven consumption.

The figures will also provide cheer to the Bank of England which raised its growth projections this week. Still, bank Governor Mark Carney insists the economy has yet to achieve “escape velocity” and wants to prevent encouraging data from raising interest rate expectations prematurely.

The goods trade deficit with non-EU countries narrowed to 2.6 billion pounds in June from 4.0 billion pounds in May, its lowest since October 2005.

The monthly figures tend to be volatile, but over the three months to June, volumes of exports were up 5.9 percent, almost twice as fast as growth in imports.

Recession in the euro zone has hurt British exporters but there have been signs recently of a modest return to growth. A survey of purchasing managers in the manufacturing sector published last week pointed to a pick-up in July in demand for exports of British goods.

In its separate release of construction data, output in the sector rose 1.4 percent in the second quarter, more than the 0.9 percent rise assumed in preliminary gross domestic product calculations.

Preliminary figures showed Britain’s economy grew 0.6 percent in the second quarter, twice as fast as it did in the first. The Office for National Statistics said Friday’s construction figures were not strong enough to cause an upward revision to that estimate, but economists said it did provide assurance the figure would not be revised down.

Seasonally adjusted construction figures showed output fell 0.7 percent on the month in June but was 1.9 percent higher than a year earlier.

Prospects for the construction sector have picked up sharply in recent months. A survey of purchasing managers last week showed activity jumped in July to hit its highest level in over three years. (Reuters)