Figures raise fresh doubts about recovery: Consumers lose confidence as tax rises loom and non-EU trade gap widens

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The Independent Online
FRESH doubt was cast on the durability of Britain's recovery yesterday by a slide in consumer confidence ahead of next month's tax increases and a widening in the underlying trade gap with countries outside the European Union.

The trade figures had little impact on the financial markets, where attention was fixed on today's meeting of the US Federal Reserve's Open Market Committee and tomorrow's inflation figures.

US economists expect the FOMC to sanction a quarter-point rise in the key US Federal Funds interest rate to 3.5 per cent.

Fears of a US rate increase helped push Hong Kong's Hang Seng share index down more than 5 per cent to close at 8,667.03, with European investors leading the sell-off. The FT-SE index of 100 leading London shares shed 20.1 points to end the day at 3,198, while the Dow Jones average fell 13.80 to 3,864.85 by close of trading.

Consumers are becoming increasingly worried both about the state of the economy and their own household finances, according to the latest monthly Gallup survey for the European Commission.

About 42 per cent of consumers expect their finances to worsen in the coming year, compared to 17 per cent expecting an improvement, the most pessimistic response for nearly four years.

People are less gloomy about the economy than their own well-being, although more expect deterioration than an improvement. Four in five consumers fear that unemployment will rise in the coming year, despite the fact that the jobless total was on a downward trend for most of 1993.

'Many people expect to be worse off when the new tax year begins, and this has serious implications for the strength of economic recovery,' said Gallup's Allan Hyde.

City economists expect the tax increases to temporarily slow the pace of economic recovery, but a growing number fear that a yawning trade gap could do more damage.

The headline trade gap with non- EU countries was slightly smaller than expected last month at pounds 672m, down from pounds 788m in January, according to figures from the Central Statistical Office. But this was flattered by the first surplus on trade in oil since 1988.

Excluding oil and other erratic items, such as ships and precious stones, the non-EU trade gap widened from pounds 612m to pounds 673m in February. The underlying trade gap in the three months to February was pounds 60m higher than in the previous three months at pounds 1.76bn, suggesting a flat or slightly worsening trend.

The EU trade deficit, which is published two months in arrears, is deteriorating much faster.

Foreign companies selling goods to Britain appear to be keeping prices down in response to the worsening in their competitive position brought about by the pound's devaluation in 1992. Import prices are virtually unchanged from a year ago while the quantity of goods brought from abroad is rising about 1 per cent a month. In contrast, export prices have been raised by about 8.5 per cent in the last year, while export volumes are on a flat trend.

(Graphs omitted)