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Cheaper pound will help to offset widening trade deficit, but exporters face uncertain future

09 Aug 2016

A shipping container in a dockyard In response to figures released by the ONS today, showing the UK trade deficit widened to £5.1bn in June, Michael Martins, Economist at the Institute of Directors said: 

“The slight widening of the trade deficit should be at least partially offset in coming months by the depreciation of sterling. The main driver of the UK’s large current account deficit has been the high level of foreign investment, which has been drawn here by the promise of substantial returns. UK investors in foreign markets, on the other hand, have seen low returns due to slow growth in the Eurozone and depressed commodity prices in parts of Africa.   

“Going forward, the depreciation of sterling should help bring in foreign currency, as foreign assets bring in nominally higher returns, while also paying out less to foreign investors. The key unknown variable will be whether foreign investors maintain investment in the UK, given its uncertain future relationship with the EU.

“The depreciated sterling should also help increase exports of services, where we have a trade surplus. Service firms are more flexible and can maintain relationships until there is more certainty over the UK’s economic prospects. Goods exporters, however, face a turbulent future due to heightened uncertainty, coupled with high sunk costs and longer time horizons. The majority of goods exports growth came in April, rather than May or June, suggesting pre-referendum uncertainty may have affected the sector”.

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