Outlook: Trade gap is a symptom of strength

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The Independent Online
DOOM AND her sister gloom were much in evidence yesterday in the reaction to the latest figures for UK trade. The January deficit on trade in goods was a record, and the traditional surplus on services is deteriorating fast. British exporters are faced now with a double whammy, the strong pound (doom) and recession in many export markets (gloom).

Kenwood's half-year loss acted as a sharp reminder of the toll the economic situation is starting to take on manufacturers. It sells into markets particularly hard hit by the global economic crisis, and sells at a price the current exchange rate has put out of reach of many customers.

The pound, after a winter dip, is heading back up. So far this year it has gained 3.5 per cent in trade-weighted terms. This is bad for companies like Kenwood, and it is not exactly brilliant for Britain either. Exports form the weak link in the British economy right now. Trade is likely to drag growth lower this year, just as it did last year. And certainly the imbalances in the economy between manufacturing and services, between exporters and consumers, are too extreme.

However, there is another way to look at the trade gap - as a symptom of strength rather than weakness. The UK, with moderate growth and a trade deficit, is in better shape than Germany, with no growth and a trade surplus at the moment.

The US, with its rip-roaring economy, is also experiencing a strong currency and record shortfalls between exports and imports anyone doubt that the US, but nobody would doubt it is in rather healthier condition than Continental Europe, with little growth and a big surplus.

Not everything about a big trade deficit is negative. Consumers get more choice, and it helps to keep inflation low and make industry more competitive and innovative.

Even so, the present situation is plainly not an ideal one. Ideally, Europe would be doing better and importing more, and Japan and the rest of Asia would be climbing out of recession. There is a serious imbalance between the Anglo-Saxon economies and the rest, which is spilling over into the balance of payments.

Trade is the most reliable symptom of sickness in the global economy. Right now there are symptoms galore, both in the widening US and UK deficits, and the recent escalation of trade tensions. We should not be parochial in our gloom and doom.

But neither should we be unduly down in the dumps about it all. Britain's monthly trade gap has never been bigger in absolute terms, but it remains a quite small proportion of GDP which is largely offset by a surplus on investment. The situation was much grimmer in the past, when it was the weakness of the UK economy, not its trading partners, which used to open up the trade gap.