Rising oil imports send trade deficit to record high of £5.3bn

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Britain's trade balance plunged into a record deficit in August, triggering speculation that the economy had contracted over the summer.

The deficit on trade in goods and services reached a record £5.3bn, a surge of £1.4bn from July's £3.9bn, the Office for National Statistics said yesterday.

The collapse was driven by the estimated £1.4bn impact from insurance pay-outs for damage from Hurricane Katrina and the largest North Sea oil deficit in modern history. The news overshadowed a strong surge in goods exports that appeared to contradict separate figures pointing to recession conditions in the manufacturing sector.

Analysts said if September were to revert to a "normal" £4bn deficit, it would take the quarterly shortfall to £12.2bn, which alone could wipe as much as 1.0 percentage point off economic growth.

"GDP growth in the third quarter is likely to have been very weak or even negative," said Jonathan Loynes, chief UK economist at Capital Economics. He said even relatively bullish growth of 0.2 per cent would force the Bank of England to revise down its forecasts ahead of its key November inflation report. "This in turn points to a good chance of a cut in interest rates at the monetary policy meeting on 10 November."

Other analysts said the distortions to the figures from Katrina and oil coming on top of long-running problems caused by a massive cross-border VAT fraud made the figures hard to interpret. "The Bank should acknowledge the distortions in the recent trade numbers and wait for some cleaner statistics before making any conclusions about the current state of net exports," said George Buckley, a UK economist at Deutsche Bank.

The ONS said the ballooning deficit was driven by both goods and services.

The services side of the economy posted a £300m surplus, the smallest since records began in 1993 other than a deficit of £920m in September 2001 related to the 9/11 attacks.

The ONS said that for accounts purposes any insurance losses were treated as being made in the same month the hurricane hit. This means Hurricane Rita could have a similar impact on September's data.

The goods trade gap also hit a record high and at £5.6bn was much worse than expected as Britain was forced to become a net oil importer for the first time in nearly a year because of shutdowns in its North Sea fields.

The £413m deficit was the first since November last year and the highest monthly shortfall on record. The poor headline news overshadowed a surge in exports that narrowed the goods deficit excluding oil by £300m.

Total exports rose 5.3 per cent over the latest three months, more than twice the 1.8 per cent pace of increase in imports. This was driven by demand for countries outside the EU, which have surged by more than 18 per cent over the past year. The data also boosted hopes of a revival in European demand with exports to the core euro area surging by almost 7 per cent.

Mark Richards, an economist at Lombard Street Research, said that if anything the boom in exports should add to estimates of economic growth.

"A favourable external environment - for the next two quarters at least - will prevent further cuts in interest rates in the near term," he said.