Falling oil prices help UK trade deficit to seven-month low

Coal Chimney England Scotland North Sea — The sun is seen behind smoke billowing from a chimney of a heating plant. Reuters

The UK's trade deficit narrowed to a seven-month low amid falling oil imports and rising silver exports.

The deficit – which measures the gap between the level of imported and exported goods and services – was £2bn in October, down from £2.8bn. This beat analysts' expectations of a £2.4bn deficit.

The UK, like most other countries that rely on energy imports, is benefitting from the drastic drop in oil prices since June. The levels of imports are roughly the same, but the cost is much less.

However, analysts are warning that a strong pound may put pay to the Treasury's hopes of narrowing the gap further this year.

"While sterling has fallen from July's high, on a trade-weighted basis, it remains about 4% higher than it was a year ago. And the eurozone, the UK's largest single export market, continues to show signs of a slowdown," wrote Maeve Johnson of Capital Economics in a note.

However, the fact that exports to emerging markets have increased bodes well.

The fact that the UK has remained in a trade deficit since 1997, when a depreciated pound allowed it to – briefly – post a surplus shows that the government's efforts to rebalance the economy towards manufacturing are falling short.

This week the latest of the UK's production output showed that manufacturing fell by 0.7% in October, leading to a cross-sector fall in output of 0.1%. Nine of 14 manufacturing sub-sectors shrunk over the month but the worst performing was electronics, which had a net drag of 0.2% on the country's total production.

The British Chamber of Commerce has called on the government to escalate efforts to rebalance. Chief economist David Kern said: "A rebalancing of the UK economy towards exports is vital to a sustained recovery and it is clear that we are not making sufficient progress towards this goal. The UK must step change its approach to supporting existing and potential exporters.

"We remain heavily reliant on trading with Europe – instead our efforts should be spent on diversification of exports to fast- growing emerging markets."