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Fall in oil prices cuts the cost of imports

Britain’s trade balance showed an improvement in January after a cut in oil prices slashed the cost of imports. This was offset by a higher pound and a fall in exports to the Eurozone.

Economists had predicted a deficit of £9.7bn in the goods trade balance, only for the cheaper oil to narrow the gap to £8.4bn. According to the Office for National Statistics, the total deficit shrank to £616m from £2.14bn in December after a steady surplus in services trade was offset by a better than expected picture of the trade in goods.

Strong pound hitting demand

Economists studying the figures felt that they represented a sign that the strong pound is affecting demand for UK goods in overseas markets. Chris Williamson, Chief UK Economist at financial data provider Markit, felt that while the headline deficit had reduced, the underlying figures reflected a more depressing outlook for the export of manufactured goods and the Government’s efforts at rebalancing away from financial services.

The figures for goods exported showed a slowdown in growth to 2.0%, down from 3.3% in the three months to December. Non-oil exports were down to 1.0% in January, this is the first decline since August last year.

Deteriorating Eurozone

The deteriorating Eurozone is having an impact on exports, and this looks unlikely to get better in the year ahead. The strengthening pound is also impacting goods exported to Europe, with the pound up around 11% against the Euro, its highest point for nearly seven years.

Should the pound remain so high, exporters will have issues trading with the Eurozone. Chief Economist at the British Chambers of Commerce David Kern said: “While it is reassuring that progress has been made to reduce the deficit, it is important not to overstate the improvement to the figures – the strengthening of the pound makes it difficult to see the trade deficit continuing to narrow in the coming months. In order to sustain these improvements the Government and the [Bank of England’s] monetary policy committee must do all they can to rebalance our economy towards exports.”

If you’re in the business of exporting, one way to keep on top of cashflow issues is to use export finance, a specialist services which provides working capital against invoices raised.

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