U.K. Exports Rising to Record Signal Recovery Progress

U.K. exports rose to a record in the second quarter, adding to signs of a broadening recovery in a week that saw the Bank of England say it plans to keep policy loose to encourage the recovery.

Overseas sales increased increased 4.9 percent to 78.4 billion pounds ($122 billion), the most since the series began in 1998, the Office for National Statistics said today in London. The deficit on goods trade narrowed to 24.9 billion pounds from 26.5 billion pounds.

Britain’s economy is showing signs of strengthening, with indexes of manufacturing, services and construction all improving in July. Bank of England Governor Mark Carney said this week the central bank plans to keep its key interest rate at a record low for another three years as the U.K. is at the “very early stages of the recovery.”

“U.K. trade looks finally to be on a slow path to recovery after years of stagnation,” Simon Wells and John Zhu, economists at HSBC Holdings Plc, said in an e-mailed note. “Higher exports would support the theory than there is demand for what the U.K. produces, and that it is not just an inventory build-up.”

The deficit on goods and services narrowed to 5.9 billion pounds in the three months from 6.1 billion pounds. That’s the smallest since the fourth quarter of 2011 and suggests net trade made a contribution to the economy’s 0.6 percent growth in the second quarter.

EU Exports

The pound was little changed against the dollar after the report and traded at $1.5533 as of 11:24 a.m. London time. The yield on the 10-year gilt climbed 2 basis points to 2.46 percent.

The growth in goods exports was led by demand outside the European Union, where sales surged 7.5 percent, exceeding 40 billion pounds for the first time. Exports to the EU increased 2.3 percent, though shipments to Germany dropped 7.9 percent, widening the U.K.’s trade gap with Europe’s largest economy.

The report also showed that foreign sales were led by intermediate goods, which rose 814 million pounds in the quarter. Exports of semi-manufactured products and consumer goods excluding cars also increased.

In France, data showed industrial production unexpectedly dropped in June, underscoring the government’s struggle to revive growth.

Industrial output fell 1.4 percent from the previous month, more than any of the predictions made by 22 economists in a Bloomberg News survey. The estimates ranged from a 0.5 percent decline to a 0.5 percent increase. The median forecast was for a 0.3 percent gain.

The decline contrasted with neighboring Germany, where production rose 2.4 percent in June. Even Italy, mired in its worst recession in 30 years, saw a 0.3 percent increase in production, the second monthly increase in a row.

U.K. ‘Party’

In June, Britain’s deficit on trade in goods fell to 8.1 billion pounds from 8.7 billion pounds in May, the lowest since July 2012. The services trade surplus widened to 6.5 billion pounds from 6.1 billion pounds, leaving an overall trade deficit of 1.5 billion pounds, the smallest since January.

“With activity in the domestic economy developing increased momentum in recent months, the external sector may now be joining the party,” said Martin Beck, an economist at Capital Economics Ltd. in London. “June’s figures, along with a run of recent positive export surveys, provide a decent springboard for export growth in the third quarter.”

Carney’s Guidance

As the U.K. recovers, Carney announced this week that the central bank probably won’t raise its benchmark rate from a record low 0.5 percent until unemployment falls to 7 percent. Policy makers don’t expect that to occur before the third quarter of 2016. The introduction of so-called forward guidance based on an economic threshold comes just a month after Carney joined the BOE, succeeding King.

In a separate release, the ONS said construction fell 0.8 percent in June from May and was up 1.2 percent compared with a year earlier. That data is based on 2005 prices.

In the second quarter, construction, which accounts for 6.3 percent of the economy, rose 1.4 percent. That’s higher than the 0.9 percent growth estimated in the gross domestic product report on July 25. The ONS said the revision won’t have any impact on GDP to one decimal place. Construction added 0.1 percentage point to GDP in the second quarter, according to the preliminary estimate.

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