The United Kingdom imports more than it exports. This resulted in a trade deficit in February. For several consecutive months the markets only heard positive news from the British economy, such as falling unemployment. The rising trade deficit serves as a reminder of the imbalances in the British economy. It has reignited worries that the United Kingdom is too reliant on domestic demand for goods and services.
What does this mean?
February’s trade deficit, i.e. the difference in value of goods imported and those exported, has risen more than expected. Every national economy strives for a balance between domestic and foreign demand for goods and services. Foreign demand drives exports. If there is a negative gap between imports and exports we speak of a trade deficit. If exports exceed imports we speak of a trade surplus (i.e. in Germany). Why is that trade deficit a bad thing? It basically means that more domestic money is spend abroad and flowing out of the national economy. The economy also becomes more vulnerable to global economic swings in demand.
Why should I care?
The economic recovery of the United Kingdom has been strong after the financial crisis. The government has taken steps to diversify the British economy. But for years now exports were not high enough. This seemed to have changed in recent month which lead to a stronger perception of the economy. Usually that perception is expressed in a stronger national currency (i.e. the British Pound rose versus the Euro). Higher bond prices or rising equities can also be a reflection of a strong economy. Financial markets reflected that in recent months. Do you think that the European and global slowdown will further affect British exports? Then you might want to sell the British Pound (GBP) against the Euro or the US Dollar or sell British government bonds.
Originally posted as part of the Finimize daily email.
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