Trade deficit narrows but eurozone still proves drag on exports

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The trade deficit in the UK shrank in March as exports to the United States, China and Russia grew strongly, official figures show- ed.

The UK’s trade deficit on goods and services was £2.7bn in March, compared to £2.9bn in February, while the deficit on goods alone was flat at £8.6bn.

Exports to countries outside the EU grew 12 per cent, driven by chemicals and cars, while the eurozone crisis continued to take its toll as EU exports were flat month on month.

While the deficit shrank slightly, economists said net trade was still likely to have knocked 0.2 per cent off gross domestic product (GDP) growth, putting a dampener on hopes that growth figures for the first quarter of the year will be revised upwards.

Vicky Redwood, chief UK economist at Capital Economics, said: “March’s UK trade figures showed a bit of an improvement, although the external sector still looks likely to have dragged on GDP growth in the first quarter overall.”

But JP Morgan economist Allan Monks added: “If global growth remains resilient this year despite a mild recession in the euro area, trade is likely to be a factor that helps the UK to sustain a modest pace of growth later in the year.”

The UK economy shrank 0.2 per cent in the first three months of the year, following a 0.3 per cent decline in GDP in the final quarter of 2011, meaning the country entered a technical recession.

Chancellor George Osborne is relying on a shift in the economy towards the private sector, particularly in manufacturing and exports, to withstand his far-reaching package of public sector spending cuts.

The deficit in trade in goods with the EU, the UK’s biggest trade partner, widened by £700m to £4.5bn in March, as exports were unchanged at £13.2bn and imports rose 4 per cent to £17.6bn.

The deficit on trade in goods with non-EU countries narrowed by £0.8bn to £4.1bn in March, as exports rose 12 per cent to £13.2bn and imports rose 4 per cent to £17.3bn.

David Kern, chief economist at the British Chambers of Commerce (BCC), said the eurozone crisis and stronger pound will put pressure on exporters.

He said: “The Government must take action to address the issues faced by our exporters.

“British companies, particularly small and medium-sized firms, have huge untapped potential to increase exports.

“Giving them extra support will help them compete on equitable terms, and will benefit the national economy as a whole.”

With the Government’s hands tied by its pledge to erase the budget deficit, the onus to boost the economy is on the Bank of England.

However, the Bank has halted its bond-buying programme.