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British Trade Balances Deteriorate Further

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The British economy is undoubtedly proving it’s robustness in these early stages of the global economic recovery. Britain however remains in the unenviable position of running a trade deficit. Although the domestic economy is of sufficient size to accommodate this deficit, it still weighs on the recovery and so efforts must be made to improve the trade imbalance.

The National Statistics Office has just released preliminary details of January’s trade figures. The Total Trade Balance is running at a negative GBP £2.565BN which is a deterioration from Decembers upwardly revised -£0.668BN. When trade with European Union countries is stripped out the balance becomes -£3.99BN. Removing Services from the equation shows that Britain imported £9.793BN more physical goods in January than it exported, this figure is also significantly deteriorating.

All the main vital signs for the British economy are healthy, GDP is growing at an impressive 2.7%, core inflation is a comfortable 1.6% and unemployment, although historically high at 7.2%, is rapidly moving in the right direction. An 88.7% Debt to GDP ratio could be improved upon but relative to it’s peers Britain’s national borrowings are very manageable.

Britain’s good economic health is also proving to be the source of it’s trade deficit problem. The British Pound, although at historically normal levels, has been rising steadily over the last 12 months. This partly explains the Bank of England’s reluctance to raise interest rates anytime soon as to do so would create demand for Sterling which in turn would detrimentally impact further on the nations trade balances.

No significant relief to the rise of Sterling is apparent from this morning’s poor trade data. The British Pound is undergoing a minor selloff but only to the extent of 15 – 20bps, it still remains well above the open of the day and although some increased volatility is present the short term trend is clearly neutral to positive.

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