Exports down. Imports up. Trade deficit soaring. Yes, it’s Groundhog Day for the UK economy.
The latest figures from the Office for National Statistics were wearyingly familiar. Exports of goods and services fell by 1.6% in October, while imports rose by 5.4%, leaving Britain in the red by £4.1bn.
Sure, there are a couple of caveats. The trade data is notoriously volatile; Britain’s biggest export market, the eurozone, is recovering but still growing only modestly.
The Institute of Directors went a step further. It saw the widening of the trade deficit as encouraging news. “The trade deficit widened in no small part because companies and households bought more from overseas – pushing up imports,” said Allie Renison, the IoD’s head of Europe and trade policy.
“This is no cause for concern and robust demand at home is a sign of confidence in the British economy. It is also encouraging that businesses continue to invest in machinery and equipment from abroad. This may increase our trade deficit, but is clearly a sign that companies are ramping up production.”
Apologies, but a widening trade deficit is a cause for concern. Companies and households are buying more goods from overseas because UK manufacturing has been progressively hollowed out over the past four decades. Imports are rising and exports are falling because what remains of UK industry is being battered by the strength of the pound.
It is also not the first airing of the notion that a bigger trade deficit means companies are planning to ramp up production. Nigel Lawson tried this line of argument in the late 1980s when the economy was about to boom out of control.
The reality is that this is how the UK economy operates as a recovery matures. Consumer demand increases and business investment starts to pick up. There is inadequate domestic capacity to meet the demand and imports rise. A widening trade deficit and a frothy housing market are signs that trouble is brewing.
In the past, financial markets paid more attention to the trade figures. Eventually, though, they get the message, which is that history is repeating itself and that all the talk of rebalancing is so much hot air. At that point, the pound starts to fall.
