UK trade deficit narrows in fourth quarter as non-EU countries buy more
The trade deficit narrowed in the fourth quarter as exports to countries outside the European Union (EU) rose sharply.
The deficit shrank to £8.6bn between October and December, a £5.6bn drop from the third quarter, according to the Office for National Statistics (ONS).
Exports to the EU rose steadily, but they were outshone by a £43.8bn increase in non-EU exports, while imports from non-EU countries fell after rising steeply in the third quarter.
The narrowing of the deficit was driven by increased exports of oil and aircraft, as well as an outflow of gold.
Goods exports increased 4.4 per cent between November and December. The UK’s trade deficit widened considerably in November despite exports rising to an all-time high of £47.7bn.
Economists are watching the balance of trade closely to see if the devaluation of sterling will boost exports, as foreign buyers find British goods less expensive. Sterling has fallen in value by around 16 per cent against the US dollar since its pre-referendum peak.
While the fall in sterling should theoretically narrow the trade deficit as exports increase, it can also have the short-term impact of making imports grow, as import bills rise in value when paid in pounds.
Export prices rose three per cent between the third and fourth quarters, while import prices rose by 2.4 per cent, the ONS said.
Despite narrowing between the third and fourth quarters of 2016, the trade deficit actually rose year-on-year to £39.4bn, as imports increased by £29.3bn.
The UK faces major changes to the way it trades as it leaves the EU. Ahead of Brexit, exports of financial services rose £1.1bn, but the increase in other professional services – including legal, accounting, consulting and research – far outweighed the financial sector, growing £4.8bn over the year.
| Exports by sector | 2016 value £m | Annual change £m | Imports by sector | 2016 value £m | Annual change £m |
| Other business | 68,987 | 4,765 | Travel | 46,277 | 4,869 |
| Insurance and pension | 17,919 | 3,105 | Financial | 11,616 | 1,746 |
| Personal, recreation | 4,684 | 1,883 | Transport | 22,299 | 668 |
| TMT | 19,532 | 1,697 | Government | 2,967 | 233 |
| Financial | 54,772 | 1,121 | Personal, recreation | 3,483 | 110 |
| Transport | 26,636 | 993 | TMT | 10,233 | -18 |
| Government | 2,658 | 70 | Insurance and pension | 161 | -33 |
| Manufacturing | 3,985 | -295 | Manufacturing | 1,449 | -68 |
| Construction | 1,175 | -420 | IP charges | 8,297 | -171 |
| IP charges | 12,064 | -612 | Construction | 839 | -367 |
| Travel | 28,768 | -989 | Other business | 38,072 | -1,206 |
| Total exports | 241,180 | 11,318 | Total imports | 145,693 | 5,763 |
UK exports reflect the economy as a whole in being dominated by services. The sector accounts for almost 80 per cent of UK GDP – and the figures showed a similar proportion of exports are taken up by the service economy.
The UK has not exported more than it imported, which would create a trade surplus, since before the millennium.
Mike Spicer, director of economics at the British Chambers of Commerce (BCC), said: “The narrowing in the UK’s trade deficit in the final months of last year is a welcome improvement from the weaker performance in the previous quarter, and reflects a growing number of goods being exported to non-EU countries.
"As Brexit dominates the headlines, the results are an important reminder that UK companies take advantage of trading opportunities in every part of the world.
“This performance comes despite the mixed reaction of exporters to the depreciation in sterling – which our research has found is hurting as many as it is helping.
"Looking ahead, the continued weakness of the pound and the expected slowdown in economic growth will likely dampen demand for consumer imports."
