Surge in trade deficit puts paid to export-led recovery

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The Independent Online

Hopes that the UK was on the brink of a major export-driven recovery faded yesterday after official figures showed that Britain's global trade gap ballooned in July.

Britain's global goods gap jumped by almost £1bn to £5.1bn, wiping out the dramatic improvement in the deficit in June.

The goods deficit had dropped unexpectedly by £1bn in June on the back of a £1.2bn surge in exports, almost entirely to countries outside the European Union.

But July's bounce-back took the deficit just a whisker short of May's figure and well above the £4.7bn pencilled in by City economists.

Paul Dales, a UK economist at Capital Economics, said: "These numbers will go some way to dashing hopes that net trade will be able to offset consumer slowdown and boost GDP in the coming quarters."

Simon Rubinsohn, the chief economist at Gerrard stockbrokers, pointed out that June's improvement had boosted second-quarter economic growth by 0.5 percentage points. "GDP growth could slow quite sharply in the third quarter," he said.

The Office for National Statistics, which compiled the data, said June's improvement appeared to be an "outlier", adding there was no simple explanation for the sudden reversal.

It reiterated last month's warning that the figures were distorted by the so-called "missing trader" fraud, where goods are imported into the UK with no tax and then either sold in the UK or exported with tax added.

The ONS has said criminal gangs have launched a "systematic attack" on the VAT system, which distorts trade figures by falsely boosting export figures and leading to under-reporting of imports. The scale of the fraud has ballooned from £1.7bn in 1999 to £11.1bn in 2002.

"I think it is clear UK trade data have to be treated with a pinch of salt at the moment due to a number of potentially distorting problems," Howard Archer, an economist at Global Insight, said.

There was further bad news from a rise in import prices, which threaten to add to inflationary pressures. Import prices excluding oil rose 1.5 per cent on the month, the ONS said.

Mr Rubinsohn said it would increase the risk of inflation remaining above the Bank of England's 2 per cent target for longer. "It provides more ammunition for the hawks on the Monetary Policy Committee," he said.

The trade figures were also undermined by a 1 per cent fall in spending by tourists in July as visitor numbers from North America fell 3 per cent.

The ONS said it was too early to tell whether this was a reaction to the London bombings, saying there had been a general fall in US tourists since the start of the year. Overall visitor numbers were 3 per cent, thanks to a 25 per surge from countries outside North America and Europe.