UK exports collapse in January

Figures released today show the UK’s trade deficit in goods widened to £8 billion in January from £7 billion in December. This was mainly the result of a 6 per cent fall in export volumes (excluding oil and erratic items).

This will come as a blow to those looking to the export sector to strengthen the UK economy’s recovery from recession.

Sterling’s effective exchange rate fell by 25 per cent in 2008; this was supposed to make UK industry more competitive and boost overseas sales of British goods. So far, there is little evidence that this is happening.

The January data are probably a blip – trade data are among the most erratic of all data releases. More worrying is the underlying trend, which shows only modest growth in export volumes over the last year.

Of course, this is due in no small part to the weakness of demand in the UK’s main export markets, particularly in the rest of Europe, and it should be that export growth will improve once Europe’s economic recovery picks up speed.

There are also some grounds for optimism in the latest business surveys. The Bank of England’s agents’ report and the CBI’s survey of manufacturing both show a steady improvement in optimism about the outlook for exports in recent months.

However, the Bank of England does note that some companies are taking advantage of sterling’s weakness to push up profit margins, rather than allowing it to feed through into enhanced competitiveness.

Depending what happens to these higher profits, this probably means some of the potential benefits of sterling’s fall – in terms of more exports, more output and more jobs – are being lost.