Wednesday, January 12, 2011

U.K. Trade Deficit At New All Time High

For the fifth month in a row, the U.K. trade deficit was at or somewhat above £4 billion in November.

The 3-month deficit was therefore £12.2 billion, up from £7.8 billion in the 3 months ending November 2009.

At the current rate of somewhat more than £4 billion per month, the deficit is exceeding the previous record level of £3.5 billion per month reached in 2007. There have thus really been no correction of the imbalances that created the crisis.

There are two reasons for this: the high inflation rate and the high budget deficit.

The high inflation rate means that the real depreciation of the pound since 2007 have been a lot smaller than the nominal depreciation. Furthermore, by pushing real interest rates far below the levels seen in most other countries, it has encouraged borrowing and discouraged savings, counteracting the little real depreciation there has been.

The other reason is the big increase in the U.K. budget deficit. Unlike the high inflation rate, this will howver likely start to correct itself this year as the governments austerity program is implemented.

The continued high inflation rate as well as euro area austerity programs will likely push the U.K. trade deficit higher, while the austerity program will push it lower. It remains to be seen which of these factors are more powerful.