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Record trade surplus in services partly offsets record trade deficit on goods

Exploring the UK trade deficit, where a record surplus on services partially offset a record deficit on goods in Q3 2014.

The UK’s current account – which captures the value of flows of income and goods between the UK and the rest of the world – reached a record deficit of 6% of gross domestic product (GDP) in Q3 2014. The UK’s balance on trade – which is the value of UK exports of goods and services less the value of UK imports – was responsible for previous steep falls in the current account balance in the 1970s and 1980s, to around -4% and -5% of GDP respectively. Trade has again played a part in the recent deterioration of the current account, but its role has been much smaller than in the past.

Figure 1: Current account by component (quarterly, percentage of GDP)

Figure 1: Current account by component (quarterly, percentage of GDP)

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Figure 1 shows that the deficit on trade currently represents 2% of GDP or around one-third of the current account deficit in total. The majority of the decline in the latter since 2011 has been due to a marked turnaround in the primary income balance, from a surplus of over 2% of GDP in Q2 2011 to a deficit of almost 3% of GDP in Q3 2014. Accompanying short stories, Recent trends in Foreign Direct Investment and Current account, income balance and net international investment position analyse this development in more depth.

The trade deficit has been relatively stable since 2009, varying between 1.0% and 3.0% of GDP. However, this masks some notable imbalances by product and country. The balance on services, for instance, reached a record surplus of 5.1% of GDP in Q3 2014, indicating that the value of UK services exports is substantially higher than the value of UK services imports. The strength of services – and of financial and insurance services in particular – partially offsets a substantial trade deficit on goods. The goods balance fell to a record deficit of 7.1% of GDP in Q3 2014, indicating that the value of UK goods exports is substantially lower than the value of UK goods imports. In geographical terms, the UK’s substantial deficit with European and Asian countries is partially offset by surpluses with nations in the Americas.

Breaking down the UK’s trade balance with the EU by country, Figure 2 indicates that even within Europe there is significant variation in the UK’s bilateral trade balances. It shows that the UK ran a trade deficit on goods and services with Spain, France and Germany in 2013, which was partly offset by a trade surplus with Ireland. It also indicates that the deficit with Europe grew in 2013 as a consequence of a larger deficit, with Germany in particular. This trend appears to have continued into 2014, as the goods deficit with Germany reached record levels in the most recent data .

Figure 2: Trade balances for goods and services with key EU trading partners (annual, £bn)

Figure 2: Trade balances for goods and services with key EU trading partners (annual, £bn)

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The recent relative weakness of goods exports is one reason for this widening deficit with the European Union. The UK’s exports of semi-manufactures – including organic and inorganic chemicals and basic metals – fell by around 14% in value terms between 2011 and Q3 2014, while the value of fuels exports fell by around 18% over the same period. Stronger exports of finished manufactures – and in particular of transport equipment such as motor vehicles – offset some of this weakness over this period, reflecting both relative movements in the prices of these goods and the UK’s success in reaching global markets with its products.

Exports of services, by contrast, have been relatively robust, and have grown more quickly than imports of services in recent quarters. Much of this growth is as a result of stronger financial services exports, which accounted for 2.8% of UK GDP in Q3 2014. Exports of other business services (2.7% of UK GDP) and insurance and pension services (1.4%) have also made a substantial contribution over this period.

Categories: Economy, National Accounts, Balance of Payments
Content from the Office for National Statistics.
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