Improving our ability to compete is only way to tackle UK trade deficit

SUCH has been the focus on the UK's billowing budget deficit that another yawning hole has gone virtually unnoticed – our trade deficit with the rest of the world. Figures yesterday showed our goods trade deficit unexpectedly widened in January to almost £8 billion against £7bn previously. The total trade gap – including both goods and services – grew to £3.8bn from £2.6bn, and was also at a 17-month high.

It has been fashionable in recent years to dismiss the trade deficit as of little consequence. But such insouciance is hard to defend in the circumstances in which we now find ourselves.

Firstly, this poor performance could push the UK economy back into recession for the first quarter of the year.

And secondly, the notion that a goods trade deficit is compensated by a big surplus on invisibles no longer offers the comfort it once did as many of these earnings relate to financial services transactions that have suffered with the global financial crisis. For reference, the UK current account recorded a deficit of 4.7bn in the third quarter of 2009, equating to minus 1.3 per cent of GDP.

More worrying still is the 6 per cent drop in exports over the month – the sharpest fall for more than three years. Exports to countries outside the EU tumbled by 12.6 per cent.

This is deeply disappointing for two reasons. Firstly, exports were expected to do well because of the fall in sterling, which makes UK goods more attractive in world markets. The pound has fallen by some 24 per cent against a basket of world currencies since early 2007 – plenty of time for a recovery in orders to show through. How much of a currency collapse will it take for exports to revive?

And secondly, hopes of recovery are pinned almost entirely on a revival in UK export business. Indeed, without a pick-up in exports in the current quarter the economy may relapse back into recession. Even allowing for the fact that both exports and imports could well have been limited in January by the very bad weather hitting the UK and other countries, the fact that exports fell appreciably more than imports is worrying news. It cannot but heighten concerns as to whether net trade can make a decent positive contribution to growth and help the economy to undergo that rebalancing urged on it by almost every major economist.

The government now faces a potentially highly damaging release of preliminary first-quarter figures for GDP on Friday, 23 April – less than a fortnight before the likely date of the general election on 6 May. And slower growth could mean even more severe fiscal retrenchment as tax revenues fall.

Ironically, the government may be spared ignominy via falling car imports with the end of the car scrappage scheme. Slower domestic demand for manufactured goods may also ease the import bill.

The figures will add to the pressure on the Chancellor for stimulus measures in the Budget later this month. But we are more critically dependent than ever on an improvement in competitiveness – and a broad lift in the global economy.