UK Pre BREXIT Deficit Widens

GBPUSD, Weekly            

UK trade deficit widened to GBP 2.3 bln in May data, out from the GBP 1.3 bln deficit since in May last year. The goods deficit widened by GBP 500 mln to GBP 9.9 bln, with exports falling by GBP 2.1 bln while imports declining by GBP 1.6 bln. That was the biggest goods deficit for the month of May on record, according to the ONS stats office. The services surplus rose to GBP 7.6 bln.

The impact of the recent sharp decline in the pound will be mixed to negative, benefitting exporters but also pushing up costs of imported components for many. The UK imports far more goods than it exports. Goods such as cars will become more expensive to the UK consumer, with 85% of demand is met by imported cars while domestic manufacturers rely heavily on imported parts. The trade deficit has acted a drag on UK economic growth, which fell to 0.4% in the first three months of this year, but a far more significant impact comes from the poor performance of the UK’s foreign investments.

The pound is trading softer in London trade, with Cable having ebbed to the low 1.2900s and EURGBP having lifted above 0.8570. Signs of weakening UK business and consumer sentiment, and an ebb in economic activity are keeping a lid on the pound. A survey of UK consumer confidence by Gfk, conducted after the Brexit vote (between June-30 to July-5), dove to -9 from -1, which is the sharpest drop in the data series since 1994. Think tank NIESR said yesterday that it estimates UK GDP went negative in June after stagnating in May. Footfall on high street shops is down and car sales and property market transactions are also down. There are bright spots, with exporters such as Burberry, a high-end fashion retailer, likely to benefit from the weaker pound, while a trade deal with India may happen within a year (a deal between the EU and India has been held for years by the former’s concerns about wine and car trade). But it’s unlikely the good-news stories will offset the probability that the UK ends up with a net-worse trade deal with the EU, given the terms the UK wants. The reason the pound is trading nearly 12-14% lower is because markets are discounting a shock to the UK economy’s terms of trade.