The UK's global trade deficit jumped to a record £55.8bn last year, from £44.6bn in 2005, according to official figures yesterday which more positively showed a meaningful reversal in december of the recent inflationary trend of rising import prices.
These trade numbers provided a reminder that not all the current economic data are hawkish from an interest-rate perspective. The pound, which fell sharply after the Bank of England held UK base rates at 5.25% on Thursday amid fears it might increase them again, dropped further yesterday with the weak trade figures weighing on sentiment towards sterling.
The UK's December goods trade deficit came in at a greater-than-forecast £7.14bn. A fourth straight quarterly fall in goods exports to countries outwith the European Union in the final three months of last year suggested the US slowdown and strong pound might be hitting UK firms.
Yesterday's numbers, in the round, made economists cast serious doubt on whether net trade would be able to make the modest positive contribution to overall growth envisaged by the Bank's Monetary Policy Committee.
MPC members, particularly Bank governor Mervyn King, have made great play of the rise in import prices in recent times, which followed a long period of decline which had kept a useful cap on inflation.
Howard Archer, chief UK economist at consultancy Global Insight, highlighted a 1.1% fall between November and December in the import price index for goods, excluding oil and erratic items.
He said: "This suggests that the pound's strength is currently having a significant dampening impact on imported goods (prices)."
Paul Dales, at Capital Economics, said the fall in import prices should ease concerns that the deflationary impact from low-cost producing countries such as China and India had run its full course.
Taking goods and services, the UK's global trade deficit widened from £4.5bn in November to £4.89bn in December. As the goods deficit widened, the surplus on services trade narrowed from £2.37bn to £2.25bn.
Comparing the third and fourth quarters to strip out month-to-month volatility, the UK's total trade deficit widened from £12.7bn to £13.5bn, mainly because of the goods side.
The UK's global goods trade deficit leapt from £68.8bn in 2005 to £84.3bn last year.
Lucy O'Carroll, director of research at HBOS's treasury services division, said: "Last year's deficit on goods, the surplus on services, and the overall deficit on goods and services were all at their highest level since the trade data were first recorded in 1697."
She added: "In the longer term, it raises rather worrying questions about the UK's trading performance. Indeed, the worsening deficit on goods trade last year came from a wide range of sectors, including capital goods, intermediate goods, consumer goods, oil, semi-manufactures and food, drink & tobacco. Our major European trading partners may have had their strongest economic performance for six years in 2006, but sterling's strength seems to be preventing our exporters from reaping the full benefits of it.
"Mervyn King, in particular, has made much in the past of his concern that rising import prices would add to overall price pressures in the domestic economy, threatening the achievement of the inflation target There are no signs from these data, either for December or the year overall, that the committee's worries about import-price inflation are being realised."
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