Economists see grim UK growth outlook as trade deficit widens

The UK's total trade deficit in goods and services widened to £2.3bn in May but was not as bad as the £3.6bn feared by economists, as exports fell 4.4% month-on-month and imports were down 3.5%.

Focusing on visible trade in goods, the Office for National Statistics calculated that the UK's visible trade deficit for May shrank to £9.88bn from the £10.53bn in April, better than the £10.70bn forecast.

The non-EU trade balance improved very slightly to a deficit of £2.57bn, from £2.60bn the month before and better than the £2.80bn consensus estimate.

For the three-month period March to May, exports were up 3.2% compared to the three months to February, which was markedly above the 1.1% increase in imports in the same period.

Economist Howard Archer of IHS Global Insight said this suggested net trade is likely to have contributed positively to second quarter GDP growth after posing a drag in the first quarter of 0.2 percentage points.

"Along with healthy retail sales in May and April, and much improved industrial production overall in May/April, the trade data suggest that UK GDP growth could actually have improved in the second quarter despite the heightened uncertainty over the EU membership referendum and likely markedly weaker activity in June," Archer said.

He currently forecasts UK GDP growth to have come in at 0.5% quarter-on-quarter in the second quarter, but expects this to be the best performance for some considerable time to come as the economy then struggles for growth in second half of the year as Brexit uncertainty persists.

Capital Economics' Paul Hollingsworth said the figures were disappointing, though noted the monthly trade figures are volatile and prone to revision.

With the three-month average trade balance narrowing, if it holds steady in June, it would leave the trade deficit lower than the £12bn outturn for the first quarter.

"The ONS has not produced trade volume estimates for April and May due to quality concerns, so it is hard to say what this means for net trade’s contribution to GDP, but it would be reasonable to assume from the values figures that net trade will exert less of a drag on GDP in Q2 than in Q1."

Looking ahead, Hollingsworth said the 10% or so fall in trade-weighted sterling since the referendum should help to boost exports in time, "although any improvement is likely to be slow against a background of fairly sluggish global growth and uncertainty about future trade relationships between the UK and other countries".