World Economy

UK Trade Deficit Shrinks

Construction data stabilized in July defying expectations among economists.Construction data stabilized in July defying expectations among economists.

The UK trade deficit, which reflects the difference between imports and exports, shrank to £4.5 billion ($5.97 billion) in July from £5.6 billion the previous month, the Office for National Statistics said.

The narrowing of the gap reflected a 2% increase in exports of goods and services, taking them to £43.8 billion. Imports fell by 0.5% to £48.3 billion, BBC reported.

Although the pound fell sharply after the Brexit vote, which should make UK products cheaper abroad, the ONS said it was too early for firm conclusions.

The pound was 15% lower against other currencies in July compared with the same time a year ago, the ONS said.

The ONS points out in its release that the general consensus among economic commentators is that the recent depreciation in the pound should boost export and manufacturing competitiveness.

However, it says this does not necessarily occur as the price of imported materials used to make UK goods rises as the pound falls.

Britain’s international trade secretary, Liam Fox, said: “This data is very encouraging as it shows a major boost for exporters post referendum. However, while these statistics are highly encouraging we need to wait for further trade data to determine whether this is a clear trend.”

Economists have been revising up their gloomy predictions for the UK economy in recent days as news of more positive data rolls in. Consumer spending appears to have held up well and surveys suggest manufacturing and services companies enjoyed a rebound in activity in August following an initial post-referendum slump in July.

Howard Archer, economist at the consultancy IHS Global Insight, said the improved trade performance in July lifted hopes it would make a positive contribution to third-quarter GDP.

“Decent news for UK third-quarter growth prospects as the trade deficit narrowed markedly in July helped by improved exports, and construction output defied expectations of a drop in output,” he said.

Based on recent business surveys published by financial data company Markit, the economy looks likely to have grown 0.1% in the third quarter. That would represent a sharp slowdown from 0.6% in the second quarter.

But Archer also noted the ONS’s warning not to read too much into one month’s data. In its report on trade, the ONS said: “As monthly data can often be volatile, it is unclear whether this is an impact of the depreciation of sterling and it is necessary to look at the trend over the next few months to get a clearer picture.”