Trade gap with China widens to £1bn a month

Britain's trade gap widened beyond expectations at the start of the year as the EU shortfall hit a five-month high and the deficit with China topped £1bn for the first time, triggering concerns that trade will hold back economic growth.

Official figures showed yesterday that the UK's deficit in global trade in goods stood at £6.5bn in February, just shy of a revised record deficit in January. The underlying trade gap, which excludes oil and other volatile items, hit an all-time high of £6.4bn.

Howard Archer, at Global Insight, said: "The deficits in traded goods in the first two months this year are a nasty shock. This raises concern about net trade's ability to make a contribution to growth."

Economists reckon trade could have been a drag on economic growth in the first quarter after providing a brief fillip in the fourth quarter of last year. Net trade has pulled UK growth lower every year since 1997, though the effect lessened last year.

John Butler, at HSBC, said: "Overall this is a poor set of trade numbers. A deteriorating trade deficit in a background in which UK domestic demand has under-performed is worrying."

While exports to countries outside the European Union are picking up, this has been more than offset by stronger imports from the eurozone, especially Germany, Belgium and Luxembourg. The gap with EU countries rose to £3.1bn, the highest since September, while the overall trade in goods and services gap widened to £4.8bn.

The shortfall with China has been steadily creeping up in recent months and hit £1.063bn in February. The UK imports a vast range of goods from China.

At the same time, Britain became a net exporter of oil again in February but by just £86m, while January's gap in oil was revised higher by about £300m to £430m.

The Office for National Statistics said the scale of the so-called "missing trader fraud" had increased, making the interpretation of the trade figures more difficult and prompting it to review its methodology for estimating the impact.

Originally, the fraud, which affects mainly mobile phones and computer chips, only involved EU member states. But since the middle of last year, trade with Dubai and Switzerland has leapt up, leading the ONS to investigate and conclude that those countries were now also involved. It leads to under recording of imports as fraudsters import goods from the EU, which they sell on before disappearing without paying VAT. The goods are eventually exported.

The ONS produces trade figures adjusted for the estimated fraud, but rejected suggestions that these should feed into GDP data, rather than the unadjusted figures. A statistician said: "This fraud is still a genuine economic activity in the same way as smuggling and the black economy are."