August 11, 2009 10:53 am

Oil imports push up UK trade deficit

Britain’s trade deficit widened in June but remains on a declining trend, as the weaker pound encourages exports and deters imports.

The deficit in goods with the rest of the world rose to £6.5bn in June from £6.2bn in May, the Office for National Statistics reported, as imports of oil rose, probably because of lower summer production of North Sea oil.

The greater trade gap in goods helped push the overall deficit up to £2.2bn from £1.9bn as the surplus in services remained at £4.3bn.

The overall deficit was still the second lowest figure this year, and helped the total deficit in the second quarter decline to £7bn from £8.3bn in the first quarter. That suggests a narrower trade gap contributed to the easing of the recession in the second quarter.

“Today’s figures are consistent with a small positive contribution from net trade to GDP growth in Q2,” said Colin Ellis, economist at Daiwa Securities SMBC. “That suggests that the surprising weakness of the economy in the second quarter [GDP fell 0.8 per cent quarter on quarter] may be centred” more in business investment and non-retail consumer spending.

Exports of traded goods excluding oil rose by 1.4 per cent month-on-month in June, raising hopes that the competitive pound will help the UK benefit from the gradual improvement in activity in major overseas markets.

Imports of goods excluding oil rose by 0.4 per cent in the month, suggesting a stabilising in domestic demand.

Sterling has firmed considerably since March but still remains well below its pre-financial crisis levels compared with other main currencies. The recent strengthening of the pound helped reduce import prices excluding oil and erratics by 1.9 per cent.

A firmer sterling combined with the still poor outlook for growth in major overseas trading partners reduces the likelihood that exports will help the UK into a strong recovery, however.

“With sterling having already reversed some of last year’s falls, we remain sceptical that the UK is about to become an export-driven economy any time soon - persistent trade surpluses still look unlikely to us,” said Mr Ellis.

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