Fall in sterling fails to help trade deficit

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The Independent Online

Britain's trade in goods stood at £7.3bn in April, unchanged on revised figures for March and slightly worse than the market expectation of a £7bn deficit, as the fall in sterling failed again to deliver an expected boost to exports.

Import and export volumes were both down, by 0.7 per cent and 0.5 per cent respectively, according to the latest figures from the Office for National Statistics, although analysts warned that the volcanic ash cloud that grounded flights for a week during the month will have affected the data.

An ONS spokesman said that, while it was impossible to precisely quantify the effects of such unusual events, the ash cloud's impact on the trade balance was likely to be "fairly minimal, given that exports and imports are air-freighted in similar proportions". Only about 10 per cent of total trade is carried by air, although this figure rises to 45 per cent with trade outside the EU.

As usual, the deficit in goods was partly redressed by a better performance in the services sector. The overall trade deficit, in goods and services, was £3.3bn in April, a modest increase on March's figure of £3.2bn.

Analysts said the volcanic ash disruption, though minor, added to other volatile items such as oil in the accounts to make them unusually difficult to read. Oil imports soared, but so did car exports. Taking "core" trade over the last quarter, smoothing such exceptional items, exports rose by 10 per cent on an annualised basis, with imports up by just 3 per cent.

That will come as encouraging news for both minsters and the Bank of England. There has been barely concealed official frustration at the failure of British trade to respond to the 25 per cent depreciation in the external value of sterling since its peak in 2007.

Bank economists have expressed the view that exporters may have been taking the benefit of the lower pound in the form of fatter profit margins, rather than taking the opportunity to expand orders and output. Recent survey evidence from the Chartered Institute of Purchasing and Supply, however, indicates that a boost to export volumes is now under way.

However, the medium-term risk now comes from the crisis in the eurozone. The financial troubles in southern and Eastern Europe may damage confidence, while the ambitious programmes for fiscal retrenchment being undertaken from Dublin to Athens threatens to push the European economy into a "double-dip" recession. This week both Britain and Germany gave notice of sharp cuts to public spending, while strikes in Spain underline the challenges facing governments trying to pursue such programmes.

Depressed demand in the eurozone, the UK's largest export market, will inevitably damage prospects for a trade-led recovery and rebalancing of the British economy. The recent declines in the euro will also leave UK traders in a less competitive position.

Richard Greenwood, the managing economist at the Centre for Economics and Business Research, said: "The increased competitiveness of the pound against the euro has seen UK goods manufacturers increase sales to the eurozone, with goods exports up by 17.8 per cent on the same period a year ago.

"This seems to indicate that the fall in the value of sterling is now materialising into firm orders. Prospects for exporters remain encouraging, though confidence in the continued strength of the euro area recovery will be a major concern."

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