China’s trade surplus tops $1tn with shifting exports impacting UK inflation outlook
China’s trade surplus exceeded $1tn in the year to November, driven by exporters redirecting shipments to markets outside the US. Exports to the EU rose 15% year-on-year and to the UK increased by 9%, while exports to the US declined sharply by 29%.
The Bank of England's November monetary policy report highlighted that Chinese exports to the UK and euro area increased as shipments to the US fell, providing early evidence that trade diversion is having a disinflationary effect on the UK. UK headline inflation currently stands at 3.2% and is forecasted to fall toward the 2% target by mid-2026. Measures announced in Chancellor Reeves’s autumn budget could contribute to trimming inflation by up to 0.5 percentage points.
The Bank of England recently cut the policy rate to 3.75%, with markets expecting at least one additional 0.25 percentage point rate cut in 2026 in response to weaker economic growth and rising unemployment.
China is the UK's second-largest import market behind Germany, with about £70bn worth of goods imported in the year to June, reflecting a 4.1% year-on-year increase. Key imports include cars, telecoms, and sound equipment. Economist Stephen Millard noted that higher Chinese imports could modestly slow UK inflation in 2026, with potential price reductions as Chinese exporters compete for UK demand.
At the same time, EU leaders have signalled potential measures to address Chinese import imbalances, while UK ministers have pledged to protect domestic steel producers from subsidised Chinese competition.
Barclays economist Jack Meaning expects core goods inflation to decelerate from around 1.5% in 2025 to below 1% in 2026, reflecting the impact of a global economic slowdown and changing trade patterns.
