Duncan’s Economic Blog

The UK Trade Balance: Good and Bad News

Posted in Uncategorized by duncanseconomicblog on September 14, 2011

Tony Dolphin has a good post up at Left Foot Forward highlighting the UK’s diminishing prospects for export-led growth. He notes that: 

A year ago, there appeared to be a decent chance the UK would enjoy an export-led recovery. Export volumes, excluding oil and erratic items, were up 18% on a year earlier, boosting growth in manufacturing. RealGDPwas increasing strongly.

Now the picture is far less positive.

The latest figures on trade, released by the Office for National Statistics, show export volumes increased just 3.7% over the last year, and were down 2.8% comparing the latest three months with the previous three.

Import growth was 3.6% over the last year – just about matching export growth – and 1.1% over the latest three months. The export boost to growth has faded away.

Export growth is currently running at 3.7% per year and import growth at 3.6%. This compares to the OBR forecasts for the full year of 7.9% and 5.0%.

Whilst export growth is no where near as strong as predicted by the OBR, import growth is also weaker than it anticipated. The end result is that the trade balance is actually in better shape than the OBR forecast back in March. Back then it expected the Q1 trade balance to come in at -£13.1bn and Q2 at -£13.7bn.

The actual outturn (-£8.5bn & -£11.3bn) is therefore better than anticipated. That’s the good news.

The bad news is that this isn’t being driven by better-than-expected exports but by lower-than-expected imports and the reason we are importing less is because domestic demand has collapsed.

This is why the consensus view of the independent economic forecasters surveyed monthly by the Treasury is that the economy will now growth by only 1.2% in 2011. And the entirety of that growth will come from net trade. Domestic demand is expected to contribute zero per cent to GDP growth.

So the better performance in net trade is actually driven by domestic weakness and isn’t enough to offset the fall off in domestic demand. I’m not sure this is how George Osborne saw ‘rebalancing’ panning out.

5 Responses

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  1. metatone said, on September 16, 2011 at 1:51 pm

    I can’t recall where, but I read someone making a very cogent point that in the era of international supply chains, increased export volume tends to require increased import volume. Things improve to the extent that you’re “adding value” in the manufacturing/assembly process, but it’s a much smaller effect than the model of “boosting exports to fix the balance” we’ve inherited from the post-war years.

    • Bristolboy said, on September 17, 2011 at 10:02 pm

      This is probably true – certainly July 2011 was a record month in terms of both exports and imports. This is the result of the globalised world in which we live in but as you say it does make things harder when relying on an export led recovery (not helped by lack of incentive from UK government and in some cases no help at all eg Crossrail train procurement).

  2. Gareth said, on September 17, 2011 at 2:22 am

    Retail sales (yes, a small part, but we get timely figures) are still showing above-trend demand growth, I maintain this “collapse in domestic demand” is a misread of the stats, or at least over-egged. 4.7% increase in nominal spending yoy to August. Supply-side disaster gives 0% volume growth. Astounding to see that split. The retail sales deflator has only been higher in the Summer ’08 oil shock over the last decade; it’s that graph which people should look at to understand the nature of the squeeze on consumers.

    http://timetric.com/index/T23TcLF8TwSO9S4YzxYL2A/

    Yes, more demand would certainly help (QE please, Sir Merv), but given that the demand growth we are seeing this year is showing up entirely as higher prices I can understand the MPC holding back a few months.

    GDP(E) figures for Q2 soon, so we’ll have a broader picture of the nominal/real split…

  3. […] Richard Murphy at Tax Research UK argues that only immediate nationalisation of the banks will restore any hopes of recovery and Left Foot Forward speculates that the Chancellor is preparing to U-turn on economic cuts and introduce ‘plan A+’. Paul Goodman writing for thetorydiary calls for the Coalition to embrace David Laws once again and allow him to head the drive for growth. Duncan Weldon provides good and bad news on the UK’s trade balance. […]

  4. QE2. « Mark on economics. said, on September 27, 2011 at 5:03 pm

    […] as Duncan Weldon tells us, is currently being driven by net exports, as consumption continues flatlining. It’s probably […]


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