The pound fell sharply on reports the UK’s deficit on trade grew more than was expected in November with imports increasing at a faster rate than exports – despite sterling weakness.
The UK’s balance of trade showed a deficit of £4.2bn in November, as imports defied weaker sterling to increase at a faster rate than exports.
The pound fell to lows of $1.2097 against the US dollar in response to the widening deficit, before paring some of its losses.
Imports grew by £3.3bn, while exports only grew by £0.7bn. The biggest contribution to the increase in imports was the £1.4bn rise in imports of machinery and transport equipment.
The devaluation of sterling in the aftermath of the EU referendum has led to hopes of an increase in exporting, as foreign countries find it cheaper to buy UK products. This has so far failed to happen.
Suren Thiru, head of economics at the British Chambers of Commerce (BCC), said: “The widening of the UK’s trade deficit in November is disappointing, and signifies a considerably weaker trading position than the average for the year. While exports increased slightly in the month, this was more than offset by a record rise in imports, confirming that there is little evidence that the fall in the value of the pound is boosting the UK’s overall trade balance."
While exports may grow gradually as the weakness in sterling feeds through, the decision for a firm to export more entails extra costs, which could result in a significant lag in sales to customers abroad.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Exports will not pick up until new entrants undercut incumbents and bring export prices down again. This process, however, likely will be even more gradual than in the past, because huge uncertainty about the UK’s future trade ties will dissuade firms from investing in the capacity required to export.”
The UK’s deficit on trade in goods now stands at £12.2bn, with imports of 37.3bn in November compared to imports of £25.1bn.
The widening balance comes after a big decline in October, when a revised figure of £1.5bn was recorded, raising hopes the trade deficit could be closed.
Howard Archer, chief UK and Europe economist at IHS Markit, said: “A key hope for the UK economy going forward is that the substantial overall weakening of the pound since the UK voted to leave the European Union in last June’s referendum will increasingly feed through to boost foreign demand for UK goods and services.”