Fall in import prices keeps lid on trade gap

Britain's trade was not as far in the red as expected in December and January thanks to falling import prices. The figures sent the pound higher on the foreign exchanges, despite signs the strong currency has started to hold back export volumes.

Exports amounted to pounds 845m less than imports in December, compared with a November shortfall of more than pounds 1bn. Trade with the European Union showed the biggest improvement, more than halving to pounds 205m.

In 1996 as a whole, the trade gap widened slightly to pounds 12.5bn - the fifteenth successive annual deficit, as the Labour Party was swift to point out. The deficit with countries outside the EU narrowed from pounds 640m in December to pounds 398m last month, the lowest figure since March 1995.

Although yesterday's figures were far better than feared, analysts warned the underlying trends were unfavourable. The latest figures were flattered by an increase of more than pounds 200m in the surplus of oil exports over imports. This climbed to pounds 664m, its highest since the oil price collapsed in 1986.

Excluding oil and other erratic items, the whole world deficit increased by nearly pounds 300m to pounds 1.94bn in December. But the non-EU trade gap showed an improvement in January even excluding these items.

A second helpful factor to the trade gap was the contribution that the strong pound has made to falling import prices - a temporary phenomenon economists call the "J-curve effect". Import prices declined by 2.5 per cent in the final quarter of last year.

The trends in volumes of underlying imports and exports were not encouraging. Although both EU and non-EU exports climbed in the latest month, this followed a sharp decline the previous month. In the final quarter of last year the volume of exports was virtually unchanged while the volume of imports climbed by 1 per cent.

The Office for National Statistics said the erratic pattern made it hard to estimate the trend, but the whole-world deficit seemed to be narrowing. Some City economists were gloomier, in the light of recent business surveys indicating that export orders have dropped.

"While we might continue to get pleasant surprises in the trade figures through the first half of this year, a marked deterioration is in prospect in the second half," said Adam Cole of James Capel.

Companies ranging from Courtaulds yesterday to EMI, Glaxo Wellcome, ICI and British Steel in recent weeks have complained that the level of the pound has made business tougher.

Although yesterday's figures showed that exports have not yet started to decline, many economists think this is only a matter of time if sterling remains near its current level.

The pound climbed about two pfennigs against the mark yesterday, to end at DM2.7590.