By Jonathan Davies

The UK's trade deficit rose to a two-year high in July, according to the Office for National Statistics (ONS).

The ONS said the trade deficit for July was £10.19bn, over £1bn more than analysts' forecasts which actually predicted a £300m fall on June's deficit of £9.4bn. It was the highest trade deficit since April 2012, when it reached an all-time high of £10.35bn.

The deficit in trade of goods and services was £3.3bn, up from £2.5bn in June.

There was cause for optimism in terms of exports, however. Despite the trade deficit rising, the value of exports did as well. The ONS figures show that exports grew by £0.5bn in July. The issue is, of course, the growing cost of imports which the ONS said grew "more significantly" by £1.3bn.

Reducing the trade deficit and boosting exports are key targets for the government. It has set the ambitious target of Britain's exports being worth £1 trillion by 2020, more than double its value when the target was set last year.

Allie Renison, Head of Europe and Trade Policy at the Institute of Directors, warned against alarmism:

“It is disappointing to see the UK trade deficit widen to its highest level in two years, but we have to look at the numbers behind the headline.

“Exports in goods increased by more than 2% from June to July, while the increase in imports is a positive sign that domestic demand is going from strength to strength.

“With the risk of the eurozone slipping back into recession increasing, and the knock-on effects of the conflict in Ukraine yet to be fully realised, the UK will need all the help it can get from its under-appreciated trade in services. The prospect of an immediate rebalancing and reindustrialisation looks more and more unlikely.

“Because it is easier to export goods over shorter distances, weak demand across Europe will have a significant impact on the UK’s chances of closing its trade deficit in goods. Conversely, the ability of our services sector to react more quickly to demand in growing markets will be a key driver of export activity in the future — a fact many are quick to ignore.”

Industrial output

In separate figures, the ONS said that British industrial output had grown by the biggest monthly rise in six months.

It said gas and electricity helped industrial output to a 0.5% increase in July, up from the 0.3% rise seen in June.

What do you think should be done to reduce the trade deficit? Do you think the UK can hit the £1 trillion target? You can email your reactions to editor@freshbusinessthinking.com

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