UK trade deficit will continue to drag economic growth

The high level of UK’s trade deficit prompted chancellor George Osborne to warn about a “dangerous cocktail” of economic risks which could turn 2016 into one of the toughest years since the financial crisis.

While addressing a room of leaders at the Cardiff Business Club in January, Osborne said: “2015 was the worst for global growth since the crash and this year opens with a dangerous cocktail of new threats from around the world. For Britain, the only antidote is confronting complacency and delivering the plan we’ve set out.”

Now, amidst claims that Britain struggled to improve its export performance due to the high performance of the pound, as well as concerns that the global economy is heading for a recession, the Office for National Statistics (ONS) may prove Osborne’s cautionary words to be true.

It found that the UK’s trade deficit widened to £10.352bn from £8.575bn in the previous quarter – the biggest gap since the start of 2015. As such, it claimed trade would continue to drag on economic growth.

Howard Archer, chief UK economist at IHS Global Insight, said: “UK exports have clearly struggled in recent months, as they have been hampered by the Sterling’s overall strength in 2015, particularly against the Euro, and moderate global demand.

“This was evident in total exports of goods and services falling 0.8 per cent month on month in December and by 0.8 per cent quarter-on-quarter in the fourth quarter. Exports of traded goods excluding oil did grow 0.5 per cent month on month in December, but they were only flat over the fourth quarter.” 

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The figures provided “further evidence that the UK’s economic recovery remained reliant on the domestic services sector”, said Paul Hollingsworth, of Capital Economics.

He suggested the UK was “clearly not immune” to a weaker external environment, which meant that any progress made in reducing the deficit was likely to be slow in the near term, leaving the recovery reliant on domestic demand.

Dennis de Jong, managing director at UFX.com, said the chancellor still had a lot of work to do to redress the trade deficit. “Osborne warned of the risks to the British economy ahead, and reaffirmed his commitment to further austerity measures,” he said. “It signals that an interest rate rise is some way off.

“However downbeat the prospects for the British economy in the year ahead, Osborne and co will be thankful that there are many major economies in a worse state. All eyes will now turn to China in the short term to see how big an effect the slowdown and share sell-off has on the UK.”

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