Cheaper oil and slowdown in demand help UK's trade balance

Car scheme causes blip in imports but 2009's trade figures are best for years
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The car scrappage scheme, which has sucked in thousands of imports, and a comparative weakening in the UK's export performance more generally sent the trade gap soaring in December, by about £300m, to £3.3bn. Imports jumped by 4.7 per cent, against an improvement of 2.5 per cent in exports.

However, despite this disappointing end to the year, 2009 as a whole saw the best trade performance for the UK in years. At £33.8bn, the shortfall between Britain's exports of goods and services and what she imports is at its lowest since 2004, helped by cheaper oil imports and depressed demand for foreign goods and services during the deepest recession in three-quarters of a century. The annual deficit is down from £38bn last year and a peak of £45bn in 2007.

According to the Office for National Statistics numbers, only one nation significantly increased its exports to Britain last year: China now exports more to the UK than France, the Netherlands or Japan. Last year, the UK's deficit with China reached almost £24bn, far ahead of Germany, which has traditionally occupied that position and netted some £15bn from trade here. Overall, though, trade with the EU is still far more in the red than even the Chinese account; a total deficit of £37bn. The UK made some £9bn from the US, its largest export market.

Short-term, the largest contribution to the deterioration in December could be attributed to the trade in cars. Car imports rose by £281m in December alone, as UK consumers took advantage of the £2,000 subsidy available on trading in their "clunkers" in exchange for newer models, often made abroad.

Around 85 per cent of cars sold in the UK are imports, and the proportion among the type of smaller, cheaper vehicles favoured by scrappage scheme buyers is even higher. While the scheme has boosted the retail motor trade, it has had a significant negative effect on the trade deficit, although that will wear off when the scheme runs out at the end of March. A one-off delivery of aircraft also pushed the deficit higher, in this case by £225m.

Hetal Mehta, senior economic advisor to the Ernst & Young Item Club, commented: "The deterioration of the trade deficit is largely associated with the success of the car scrappage scheme, which has led to imports of cars far outstripping that of exports. As this comes to an end over the next couple of months we are likely to see some improvement in the trade balance as the boost to imports fades."

However, there was some disappointment that the 25 per cent depreciation in the value of sterling since 2007 and the revival of world trade since last summer has not yet yielded more impressive results. Taking the last quarter of last year, the volume of exports rose by 5.8 per cent, but the volume of imports is up by 7.2 per cent.

The concern is that exports and trade will contribute little to growth to offset the expected loss of momentum in the economy as the fiscal stimulus starts to be reversed and interest rates rise to more normal levels, both expected to be in train by the year end. "It looks unlikely that net trade is in a strong enough position to offset the looming weakness in the public and consumer sectors," said Vicky Redwood, economist at Capital Economics.

The trade deficit for 2009 represents about 2.4 per cent of GDP, down from a peak of 3.4 per cent in 2005, evidence that the British economy is beginning to "rebalance".

Economists at Moody's added: "Whilst Britain's goods trade balance will remain firmly in the red through 2010, we expect to see a steady improvement. Nevertheless, high prices for oil and other imported raw materials will continue to fan the overall import bill."

The revival in world trade since its nadirs last year has helped to boost export and import volumes across the world, including the UK, reinforcing the general view that the world economy has returned to growth, albeit uncertainly, and that demand has stabilised and is rising, pushed along by the extraordinary fiscal and monetary stimulus administered to the world's economies.

Industry surveys, such as those carried out by the CBI and the Chartered Institute for Purchasing and Supply indicated that trade volumes should pick up again in coming months.

Trade growth seems set to continue to be driven by the emerging economies. The UK's exports to China rose 31 per cent in the last quarter of 2009 compared with the same period in 2008, from a low base, while imports from China fell 0.9 per cent. The UK's imports from China remain about four times higher than our exports to China.