Recession and cheaper pound help to cut UK trade deficit

The recession is contributing to an improvement in the UK’s monthly trade balance according to new figures released by the Statistics Commission. Britain’s trade in goods deficit for May 2009 fell to the lowest level in three years mainly as a result of a fall in consumer demand for imported goods.

The depreciation of sterling has also helped but the downturn in global trade has meant that a more competitive exchange rate has yet to really show through in higher export volumes. Many of the UK’s main trading partners remain stuck in recession.

The UK trade figures were also boosted by the first oil surplus since September as oil refineries cut their imports of oil in a bid to reduce stocks.

It is perfectly normal for a trade deficit to reduce in size during a downturn since the UK has a high income elasticity of demand for imported goods and services. But don’t expect the deficit to disappear since many of the underlying causes of the gap between exports and imports are structural rather than cyclical.