Slowdown in domestic demand cuts UK trade deficit to £4.8bn

A fall in imports helped cut Britain's trade deficit with the rest of world and supported mounting evidence of a slowdown in domestic demand.

A fall in imports helped cut Britain's trade deficit with the rest of world and supported mounting evidence of a slowdown in domestic demand.

Official figures showed yesterday that the UK's goods deficit narrowed to £4.8bn in February from the previous month's £5.1bn shortfall. The improvement was driven by a fall of 1.3 per cent or £286m in total import volumes, thanks to a 4 per cent drop in non-EU imports.

Excluding oil and other volatile items, the UK's import bill is down 5 per cent since it peaked in December and at its lowest level since May last year. The weakness was concentrated on the industrial rather than consumer side, with intermediate and capital goods reporting falls.

Michael Hume, a senior European economist at Lehman Brothers, said the drop in imports was "corroborative evidence" of a slowdown in domestic demand. The picture was confused by separate figures showing a rebound in retail sales last month after five months of weak or falling sales.

The British Retail Consortium said sales in March were 5.4 per cent up on a year earlier, the fastest annual rate since May. Excluding stores opened in the past 12 months, growth hit a nine-month high of 1.8 per cent.

The BRC, which has consistently called for a cut in interest rates, played down the figures, saying that much of the volume had been at the expense of price cuts. Kevin Hawkins, its director-general, said: "Easter wasn't bad but the rest of the month was hard going for most retailers.

"Underlying consumer sentiment has not changed and will not do so as long as another rise in interest rates is threatened."

Meanwhile, government figures showed that house prices fell 0.5 per cent between January and February.

The Office of the Deputy Prime Minister said the slight fall in UK prices could be attributed to falls in prices in all dwelling types except for flats.

The City's economics community is split, after 28 out of 47 economists polled by Reuters forecast another rise this year, with the rest saying the cycle had peaked.

Of those, 17 bet on an increase on 9 May, the rescheduled date for the next rate decision, to avoid a clash with general election polling day on 5 May.

Analysts said the MPC will be torn between signs of a sharp slowdown in consumer spending and inflationary pressures from the factory floor and the labour market .

Trevor Williams, the chief economist at Lloyds TSB Financial Markets, said that, on the surface, the weak trend in consumer spending implied the need for a rate cut.

"But such a view would really be to ignore some other important influences on consumer spending," he said, adding: "Since few people are projecting rising unemployment or falling wage inflation, this would imply that employment income will support consumer spending going forward."