Trade to contribute to UK growth despite May export slump

[LONDON] Trade appears set to make a rare contribution to UK economic growth in the second quarter despite a sharp decline in exports in May.

Figures published by the Office for National Statistics on Friday showed the deficit in goods and services widened to £2.3 billion (S$4 billion) from £2 billion in April. Exports fell 4.4 percent, with shipments of goods alone dropping 8.2 percent. Total imports declined 3.5 percent.

It still leaves the shortfall for the quarter on course to come in well below the £12 billion between January and March. The trade deficit will narrow unless June sees a gap of £7.8 billion, a level never registered in any month on record.

As the shock vote to leave the European Union hits consumer confidence and threatens business investment, trade - a consistent drag on growth - may emerge as a bright spot if the sharp fall in sterling boosts demand for British exports. The risk is that key markets in the EU weaken in response to Brexit. The pound's depreciation will also push up the value of imports.

The currency has fallen 13 per cent against the dollar since the June 23 referendum to its lowest levels in 31 years. It was at US$1.2931 as of 10.06 am London time, up 0.2 per cent on the day.

Friday's figures add to evidence that the economy performed fairly well in the months before the vote, though sentiment weakened in June and has turned down sharply since the result. Growth may have accelerated to 0.6 per cent in the second quarter from 0.4 per cent in the first, the National Institute of Economic and Social Research estimated on Thursday.

"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," said Howard Archer, chief economist at IHS in London.

In May, sales of goods to the EU, the destination for almost half of British exports, fell 2.5 per cent. Shipments to countries outside the bloc dropped 13 per cent. It followed a sharp increase in exports in April and left the overall deficit in goods higher on the month at £9.9 billion.

Separate figures show cost pressures in the labor market picked up in the first quarter, though not to a level that may worry the Bank of England. Unit labor costs rose an annual 1.9 per cent compared with 1.5 per cent in the previous three months. Productivity measured by output per hour climbed 0.4 per cent.

BLOOMBERG