Slow progress on trade deficit shows sluggish return to growth

Overall deficit fell by just £200m in November
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The Independent Online

The UK's trade deficit improved marginally in November reinforcing the belief among most economists that the recession is over.

However, while a number of experts had predicted that the imbalance would remain flat in November, the improvement is only sluggish and will disappoint those that had hoped the recovery would be led by a spike in exports.

The Office for National Statistics (ONS) reported yesterday that the overall deficit in goods and services fell to £2.9bn in November, a £200m improvement on October's numbers. However, the improvement was largely the result of a fall in the volume of imports, rather than growth in exports.

In goods, the deficit shrank to £6.8bn in November, from an adjusted shortfall of £7bn the previous month, while the economy recorded a surplus of £3.9bn in the trade of services.

The figures cast doubt on the Bank of England's growth forecasts. The Bank has predicted that GDP growth could be as high as 4 per cent by the middle of the year, despite the economy still technically being in recession until the ONS publishes official fourth-quarter GDP figures at the end of this month. Economists largely agree that the economy is now growing. The UK stayed in recession in the third quarter of last year, with GDP falling by 0.2 per cent, despite most other developed countries emerging from the downturn.

"The improvement in the trade numbers in November is welcome, but it is probably due to a stabilisation in global demand. In the bigger picture, however, we are yet to see a rebalancing of the UK economy," said Colin Ellis, an economist at Daiwa Securities.

"While yesterday's figures affirm our view that we had positive growth in the fourth quarter, it is hard to see a strong recovery being led by exports. Even though the Bank's growth predictions would be lovely if they turned out to be true, we would not put money on it."

Indeed, while the month-on-month trade figures for November painted an improving picture, the deficit in goods in the three months to the end of November grew. The ONS said the shortfall increased by £1.6bn to £20.7bn, compared to £19.2bn in the three months to the end of August.

With consumer demand expected to be muted by the continuing growth in unemployment over the next few months and public sector spending likely to be restricted, it is hard to identify the catalyst for a strong recovery.

"We are still hopeful that exports will increasingly benefit from sterling's weakness and improving global growth and trade, and lead to net trade making a positive contribution to UK growth in 2010 – especially as we expect imports to be limited by only gradually improving domestic demand," said Howard Archer, chief UK and European economist at IHS Global Insight.

"Nevertheless, the process is still proving disappointingly slow."