Europe's recession pushes UK deeper into deficit: First estimate of trade performance since change in statistics is better than financial markets feared

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THE DEEPENING European recession helped to drive Britain's first- quarter trade deficit some pounds 150m deeper into the red to pounds 4.5bn, the largest quarterly shortfall for three years.

The first official estimate of the UK's worldwide trade performance since December was better than the financial markets had feared. The new figures are based on VAT returns instead of customs documents.

But the Central Statistical Office warned that the figures may be revised. Its caution helped to dull reaction in the financial markets. The pound ended 0.67 pfennigs lower at DM2.4746 after rumours of a government corruption scandal brought it off the day's best levels.

The figures suggest that Britain's export performance is being blunted by the recession in Europe, Britain's principal market. Analysts believe it is too early to expect much benefit from the pound's devaluation. The figures may now result in a downwards revision of the 0.7 per cent growth in the first quarter.

The trade figures were disappointing when measured in volume terms, which strip out the impact of price changes and currency fluctuations. Excluding trade in oil and erratic goods, like aircraft, ships and precious stones, export volume edged just 0.5 per cent higher during the quarter while imports rose by 2 per cent.

The figures also suggest that exporters may have taken advantage of the falling pound to raise their prices rather than expand market share, a development the Treasury had hoped would take place in the months following Black Wednesday.

In the latest quarter, export prices in sterling terms increased by 6 per cent, against a 4 per cent advance in import prices. Since the third quarter of last year, import prices have jumped by 13.7 per cent, reflecting the fall in the pound. But export prices have climbed by a greater-than-expected 9.5 per cent.

The Treasury yesterday repeated its hope that exporters would take advantage of improved competitiveness from falling wage costs per unit of output as well as a lower pound.

In cash terms, exports to the European Community rose by pounds 640m to pounds 16.2bn but the value of goods shipped to the rest of the world climbed by more than pounds 1.3bn, to pounds 13.4bn. Imports from the EC rose by just over pounds 600m to pounds 17.3bn, while imports from the rest of the world advanced by pounds 1.5bn.

Although the deficit with the EC was broadly unchanged from the fourth quarter at pounds 1.1bn, it was substantially larger than the pounds 670m shortfall in the first quarter of 1992. Compared with last year's fourth quarter the shortfall with the rest of the world was about pounds 170m deeper, at pounds 3.4bn.

The total deficit was arrived at after record imports of pounds 34.1bn exceeded exports of pounds 29.6bn, also a new peak.

The figures were compiled from partial estimates of trade with the EC based on VAT returns by importers and exporters, in addition to traditional customs statistics for trade with the rest of the world.

The Institute of Directors yesterday voiced 'extreme caution' in interpreting the figures. An IOD survey revealed that the switch from professional agents to business as statistical sources prompted by the advent of the single European market was a traumatic burden for many companies. Almost a quarter of companies surveyed have barely started gathering the statistics.