An unexpected fall in the trade gap with the EU cut Britain's global trade deficit in November by considerably more than the City had expected. But the trend for the underlying volume of exports remained flat and a drop in imports suggested that inventories were being cut back.
Despite these warning signals for growth in the short term, a new forecast from the London Business School suggested that the economy would expand by 2.6 per cent. Last year's interest rate reductions around the world would prevent the current global slowdown from developing into a recession.
The trade deficit with the EU fell sharply from pounds 502m in October to pounds 131m in November, its lowest for over two years. As a result, the global trade gap fell to pounds 567m, a third of the huge deficit in October.
The narrowing in the visible trade gap with the EU came both from rising exports and falling imports. Despite the slowdown in Continental Europe, exports to the EU rose by pounds 264m while imports fell by pounds 107m. However, the lion's share of the jump in exports was accounted for by precious stones, a notoriously erratic item in the trade figures.
Stripping erratics and oil out of the figures, it is clear that the end of last year brought hard times for firms exporting to the EU. The underlying volume of exports fell by 1.2 per cent in the three months ending November, compared with the previous quarter.
Britain's exporters fared considerably better with countries outside the EU with a quarterly increase of 3.8 per cent. However, with the EU accounting for almost 60 per cent of total exports, the decline in trade there meant global exports grew by only 0.8 per cent in the three months ending November.
If exports were to continue growing at this rate in 1996, the annual rise would be 5 per cent short of the 8.25 per cent increase in non-oil visible trade forecast by the Treasury last November. According to Adam Cole, UK economist at James Capel, this would be sufficient, other things being equal, to cut 1 per cent off the Chancellor's 3 per cent growth forecast.
Another contractionary force in the economy is destocking. A quarterly fall of half a per cent in the underlying volume of imports in the three months ending November suggested that inventories were being reduced. Excluding erratics, semi-manufactures fell back particularly sharply by 2 per cent. Basic materials also fell by 0.3 per cent.
The London Business School says that strong consumer spending will underpin growth of 2.6 per cent in 1996, with inflation at 2.5 to 3 per cent.