Explanation beyond exchange rates: trends in UK trade since 2007

The UK’s trade performance since the onset of the economic downturn has been one of the more curious developments in the UK economy. While the sterling effective exchange rate declined by more than 25% between Q3 2007 and Q1 2009, the balance of trade in goods and services remained broadly unchanged both during and following the depreciation. This article sets out several possible explanations for the UK’s recent trade performance, including the roles of global supply chains, the importance of financial services exports, commodity and relative price movements and the extent of overseas demand. Although evaluating the relative importance and impact of these factors is beyond the scope of this article, it provides insights into the domestic and global conditions faced by the UK during and following the depreciation.