Net trade will probably provide little support to UK GDP growth in Q2

Data released on Tuesday by the Office for National Statistics (ONS) showed that UK's trade deficit overshoots forecasts in June after imports hit record high. According to the ONS, UK trade data that showed a widening deficit in trade in goods and services to £5.1 billion ($6.26 billion). The deficit was well above consensus expectations for a deficit of £2.6 billion. The deficit in goods alone widened by £900 million to £12.4 billion, the ONS said.

Data suggested that UK trade held back growth in the second quarter in the run-up to the country's referendum. The deterioration in the UK's trade deficit likely acted as a drag on growth in the second quarter, the ONS said Tuesday. The agency estimated the economy expanded at a quarterly rate of 0.6 percent between April and June, a stronger pre-referendum performance than many economists had expected. UK second-quarter growth estimates will be published later this month.

The pound is heading towards its weakest levels since the June referendum, as traders digest today's news. Sterling is still below $1.30 against the US dollar (down 0.48 percent at $1.2975 at the time of writing). And against the euro, the pound has lost 0.51 percent to around €1.17.

Drop in the sterling exchange rate will have significantly improved the competiveness of UK's goods and services globally. Over the medium term, therefore, the UK economy can expect to enjoy a genuine boost to activity and hence the trade balance can narrow. That said, a weak pound will hit people in the pocket thus further reducing consumption.