More GDP falls and wider trade deficits to come for UK as winter looms

(Alliance News) - Already frayed nerves for the UK economy were compounded after the release of less-than-stellar economic data on Wednesday morning.

The nation's trade deficit widened, its industrial production shrunk and its gross domestic product also weakened.

The releases came amid a backdrop of gilt volatility, with fears of a bond market cliff-edge if the Bank of England does indeed pull its support later this week.

"The parlous state of the UK's trading status is also likely to pile additional downward pressure on the sterling which has already softened following the new government's 'mini budget'," Ebury analyst Jack Sirett commented.

The UK's trade deficit widened in August, according to the Office for National Statistics

The overpowering influence of a strong US dollar is another headwind on sterling and the dollar’s status as the world’s reserve currency will put further pressure on businesses in the UK as the cost of raw materials is pushed up.

Exports rose 2.2% on a monthly basis in August to GBP68.24 billion from GBP66.80 billion in July. Imports rose at a faster pace, however, climbing 4.5% to GBP75.32 billion from GBP72.24 billion.

It meant the UK's trade deficit amounted to GBP7.08 billion in August, stretching from GBP5.45 billion in July.

The deficit was "huge" by historical standards, Pantheon Macroeconomics analyst Gabriella Dickens commented.

"Once again, the colossal size of the trade deficit in August largely was due to the surge in natural gas prices. Indeed, the jump caused import values to increase to a survey high of GBP75.3 billion," Dickens explained.

The deficit is likely to remain chunky going forward, despite a weaker sterling. A weaker pound is seen as a tailwind to exporters in the UK, though Dickens noted that any benefit is likely to be "disappointingly small".

"Costs for UK exporters jump when sterling depreciates as they tend to rely on inputs sourced from overseas. In addition, they tend to price their goods in foreign currencies, mostly the US dollar. As a result, exporters usually hike their sterling prices when the pound weakens, limiting the improvement in the competitiveness of their goods in international markets," the analyst explained.

"Natural gas futures prices suggest the overall trade deficit likely will increase to about 7% of GDP in Q4, from 4.2% in Q2, and will remain above 6% of GDP through 2023. Sterling, therefore, will remain very sensitive to any changes in overseas investors' willingness to provide finance to UK institutions."

Meanwhile, a weak August GDP reading has left the UK "a big step closer to recession", according to another Pantheon analyst.

"August's drop in GDP likely marks the start of a downward trend that will continue deep into next year," Pantheon analyst Samuel Tombs commented.

The UK economy shrank by 0.3% in August from July, following a downwardly revised 0.1% climb in July from June. Month-on-month growth in July was initially forecast at 0.2%.

August's gross domestic product was expected to have remained unchanged from July.

AJ Bell analyst Danni Hewson said: "It's clear concern about rising prices is making people think twice about where they spend their money and how they spend their time. While July's economic health was bolstered by a number of sporting events that got people out and about, August was coloured with caution. Households were terrified about what the winter ahead had in store, as they read headlines predicting horrific energy bills, and witnessed first-hand as inflation squeezed their spending power.

"Rising prices, falling confidence and cooling temperatures seem to be the perfect recipe for recession and there's every indication that in September the economy will have followed August's path, helped along by a bank holiday detour."

By Eric Cunha; [email protected]

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