New blow for Coalition economic rebalance as UK trade deficit widens

Trade deficit jumped to £9.2bn in May from £8.9bn in April in new blow to George Osborne

Economics Editor

A swelling trade deficit and a shock fall in manufacturing output have dealt a blow to the Coalition's strategy of rebalancing the economy.

The Office for National Statistics has reported that the trade in goods deficits jumped to £9.2bn in May, up from a £8.9bn gap in April and higher than economists' expectations.

Earlier in the week official figures showed factory output fell unexpectedly by 1.3 per cent in May, with some economists suggesting the strength of the pound could be crimping export orders. George Osborne was in India this week in a bid to encourage bilateral trade and investment with the fast-growing emerging market economy.

He has also recently heralded indications the recovery is broadening out from household consumption and services growth to business investment and industrial production.

But Paul Hollingsworth, of Capital Economics, called the latest trade figures “disappointing” and predicted the adverse effects of the strong pound would continue to be felt by manufacturers over the coming months.

“For now, then, the onus remains firmly on domestic demand to keep the UK's economic recovery chugging along,” he said.

That view was echoed by Howard Archer of IHS Global Insight, who said: “Net trade will likely find it difficult to make a sustained, significant positive contribution to UK growth in the near term at least, given muted domestic demand in the eurozone and the strength of sterling.”

The ONS said the £400m jump in imports of aircraft parts was the main driver of the widening deficit.

Exports of goods to countries outside the European Union crept up by £200m in May, but by less than the value of imports, widening that element of the deficit to £4bn. Analysts had predicted a contraction to £3.4bn. Including the UK's traditional surplus on services, the total deficit widened to £2.4bn, up from £2.1bn in April.

The value of sterling, weighted by our major trading partners, has increased by 14 per cent since the recovery began in early 2013, as analysts have priced in an earlier interest rate rise by the Bank of England.

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