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Export Boost Leaves UK Current Account Deficit Far Smaller than Expected

Uk trade data

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The UK currenct account deficit stood at £8.6BN in the second quarter of 2021, far smaller than the -£15.6BN the consensus was looking for, and smaller than the -£12.8BN recorded in the first quarter.

The current account balance of payments is a record of a country's international transactions with the rest of the world and has a particularly important fundamental bearing on how the British Pound is valued and behaves.

The current account is composed of a country's trade in goods and services, its net earnings on cross-border investments and its net transfer payments.

"The current account deficit remained in Q2 much smaller than its 4.2% average in the second half of the 2010s, thanks partly to the end of contributions to the E.U.’s budget," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

Tombs says the £3.9BN deficit in current transfers was the second smallest since Q4 2008, largely as a result of the UK's exit from the EU .

The ONS announced a sizeable upward revision to export growth in the second quarter, with exports rising from 4.0% quarter-on-quarter to 6.2% q/q.

The previous Q2 estimate was half this at 3.0%.

Uk trade balance

Above: The UK’s trade balance was 0.1% of nominal GDP in Quarter 2 (Apr to June) 2021. Source: Office for National Statistics – GDP quarterly national accounts.

The ONS reported a rise of 13.4% in exports of goods, because of rises in chemicals, machinery and transport equipment, and material manufactures.

But exports of services fell by 1.8%.

There was a sizeable downward revision to import growth from 6.5% q/q to 2.4% q/q.

Net trade added 1.0 percentage points to Q2 GDP growth, having subtracted 0.7 points previously.

Looking ahead, Pantheon Macroeconomics expects the current account deficit to widen gradually, as imports of travel services rocket when Brits begin to take overseas holidays again.

Also likely to drive up the deficit is the are surging global gas prices, given the country's reliance on natural gas imports.

For the Pound, developments concerning the current account deficit are crucial.

"Sterling’s depreciation over the last week, despite the rise in expectations for U.K. interest rates, highlights how the persistent current account deficit leaves the pound sensitive to changes in global investor sentiment," says Tombs.