• Trade deficit lowest since June 2013…
• …driven by puzzling drop in imports
• Trade picture contrasts with weak construction data
Martin Beck, senior economic advisor to the EY ITEM Club, comments:
"May's trade data showed a surprisingly low trade deficit of just £0.4bn – the lowest since June 2013. This was due to a sharp narrowing of the goods deficit as exports remained flat and imports fell sharply.
"Does this mean that the UK's perennially poor trade performance has made a decisive turn for the better? Probably not. As ever the month-to-month data is incredibly volatile and a large chunk of the improvement in the overall trade position has been due to a collapse in imports over the past two months. Given the strength of consumer demand, such a sharp drop in imports is difficult to square and it will be a major surprise if this weakness is not reversed in the coming months.
"As things stand, it looks likely that net trade will make a positive contribution to GDP growth in Q2, going someway to offset the large drag seen in Q1. The geographic breakdown of UK exports provided a stark reminder of the challenges facing UK firms. Exports of goods excluding oil & erratics to EU destinations were up only 0.6% in the three months to May, while exports to non-EU destinations rose by 7.7% over the same period. The 10% appreciation in the pound against the euro since the start of the year is clearly causing some major problems for those exporting to the UK's largest market.
"The stronger trade data was in complete contrast to the very weak construction release, which reported a monthly decline in output of 1.3% in May puting the sector on course for a quarterly decline in output of 0.6% in Q2. This adds some downside risk to the first estimate of Q2 GDP growth and may mean that it comes in towards the lower end of our range of 0.6-0.7%, when it is published at the end of the month."