Widening UK trade deficit highlights challenge for next government

Britain's trade deficit widened in the first three months of 2015, highlighting one of the big challenges facing the Conservative government over the next five years.

While the gap between imports and exports improved slightly in March, to £2.8bn from £3.3bn in the previous month, this was mainly due to a larger gap in February than first estimated. The Office for National Statistics (ONS) initially thought the deficit was £2.9bn.

The gap in March reflected a deficit of £10.1bn on goods, which was partially offset by an estimated services surplus of £7.3bn.Less volatile quarterly data showed the trade deficit was £7.5bn in the first three months of the year, widening by £1.5bn compared with the previous quarter.

The deterioration was driven by weaker goods exports to the EU, as oil exports to countries such as the Netherlands fell. "The strong pound is hitting demand for UK goods in overseas markets," said Chris Williamson, chief economist at Markit.

"Further export losses look likely in coming months, dealing another blow to hopes that the UK economy is rebalancing away from domestic consumption towards exports."

However, the trade deficit with non-EU countries narrowed by £0.8bn to £8.4bn, as exports increased. US exports reached a record high £11.5bn, according to the ONS.

Despite the improvement in exports, economists believe Britain's trade performance dampened growth in the first quarter. The Office for Budget Responsibility, the government's fiscal watchdog, expects net trade to act as a drag on growth until the end of the decade as Britain's export market share continues to decline.

Vicki Redwood, chief UK economist at Capital Economics, said: "Looking ahead, survey measures of export orders do not paint a particularly encouraging picture of the near-term outlook for exports. Indeed, the weak eurozone and strength of the pound are likely to hamper the UK’s export outlook for the foreseeable future."

Martin Beck, senior economic adviser to the EY ITEM Club, said the data suggested that achieving more balanced growth remained a challenge: "There are other reasons to think that the UK’s external performance is unlikely to see much change in the near-term.

US GDP has stagnated in the first quarter, while recent evidence has pointed to the recovery in the eurozone economy not being quite as robust as previously believed. In addition, survey measures of firms’ export orders suggest that UK exporters are struggling to boost sales overseas.

“Overall the familiar pattern of an overwhelmingly domestically-driven expansion shows little sign of going away anytime soon."

telegraph.co.uk