Crowning the worst year for the trade deficit since figures for imports and exports were first collected in Stuart times, the United Kingdom government admitted this week that Britain was just under £56-billion in the red last year.
Data from the office for national statistics showed that, under Tony Blair, Britain’s trading performance has been worse than under any of his Labour predecessors. More worryingly, the data shows that the trade deficit has been deteriorating steadily under the present government, with Labour inheriting a surplus of £1,8-billion — or 0,2% of GDP in goods and services — in 1997, the year it came to power. It is the only time the country has been in the black in the past two decades.
The latest figures show that the £1,8-billion surplus in 1997 became a £7,1-billion deficit in 1998 and the red ink has flowed more plentifully every year since. Officials have yet to work out last year’s deficit as a proportion of the economy, but it will almost certainly be well in excess of 4% of GDP.
Only the strength of Britain’s service sector saved the country from an even worse performance last year. The deficit in goods alone — primarily food, oil and manufactured goods — stood at a record £84,3-billion last year, up from £68,8-billion in 2005. The goods deficit is running at about 6,5% of GDP.
Up until 2006, the worst year on record for visible trade was 1974, when the four-fold increase in the price of oil following the Yom Kippur war and the three-day week left Britain with a trade deficit of 6,3% of GDP.
The same year saw the record deficit for goods and services: 4,9% of GDP. That is unlikely to be surpassed this year, although a further deterioration would make a deficit of 5% of GDP a possibility. Part of the deficit in goods was offset by a record performance by the service sector, where the 2005 surplus of £24,2-billion was beaten by a record £28,5-billion surplus last year.
The bad news on the trade front continued right up until the end of the year, with a surge of imports to meet consumer demand over Christmas and the impact on exports of the strong pound combining to produce a larger-than-expected deficit in December alone.
The national statistics office said December saw a deficit of £7,1-billion in goods, a £2,2-billion surplus in services and a £4,9-billion overall deficit in goods and services — worse than the City had been predicting. Unlike in previous decades, however, reaction to the news in the markets and from the government’s opposition was muted.
“December’s UK trade figures are a reminder that not all parts of the economy are strong,” said Jonathan Loynes, economist at Capital Economics. “Admittedly, the latest export surveys have been buoyant. But the full effects of the strong pound and weaker overseas activity have yet to be felt. It supports our view that net trade will be a major drag on growth this year.”
The UK ran a trade deficit with all but one (the United States) of its G7 partners last year, recent figures show. The deficit in goods with Germany was £15,5-billion, with Japan £3,8-billion, with Italy £3,7-billion, with France £1,6-billion and with Canada £1,1-billion. There was also a £12-billion goods trade deficit with China.
The trade surplus with the US was £6,3-billion — down from £8,7-billion the previous year. With exports to non-EU countries falling for the second quarter in a row, analysts said this suggested that a slowdown in US growth is starting to have an impact on the UK economy.
Britain’s increasing dependency on imported oil — as supplies from the North Sea run out — has been one factor in the deterioration, with a surplus of £900-million in 2004 becoming a shortfall of £3,7-billion last year. The price of crude oil — just more than $30 a barrel before the invasion of Iraq in 2003 — was this week hovering just below $60.
One success for the government during the course of last year has been the crackdown on so-called missing-trader fraud, a scheme by which fraudsters illegally reclaim VAT by continually importing and exporting the same goods. Missing-trader fraud peaked at £5,7-billion in March last year, but dropped to £100-million by December. — Â