Trade gap with rest of world hits £3bn record

Britain's trade deficit with the rest of the world widened to a record in July as imports surged to new peaks and exports fell, official figures showed yesterday.

Britain's trade deficit with the rest of the world widened to a record in July as imports surged to new peaks and exports fell, official figures showed yesterday.

But there was a glimmer of hope from provisional figures for August that showed exports to the United States surging at their highest level for three years as exporters gained from the pound's depreciation against the dollar.

The UK's deficit in trade in goods ballooned to £3bn in July from June's £2.4bn, the Office for National Statistics said. Imports rose 1.5 per cent to record levels, while exports fell 1 per cent.

Economists said the robust level of imports highlighted the strength of the UK domestic economy and warned that interest rates might have to rise to restrain demand. Ian Stewart at Merrill Lynch said: "They suggest the domestic economy remains fairly buoyant, and I think it does underscore the case for some further tightening."

There was little market reaction because analysts had expected a poor set of numbers, as a record £2.7bn deficit with non-EU countries in July had already been published.

The August figures showed that gap had narrowed to £2.4bn, thanks to 6.5 per cent growth in exports. A breakdown by region showed that exports to the US rose 18.5 per cent in August, the highest since January 1997. Since the figures were compiled, the pound has weakened further earlier this month to a 15-year-low against the dollar.

Neil Parker, UK economist at Royal Bank of Scotland, said: "With the pound weakening against the yen and dollar, export volumes to these regions should improve markedly in the months ahead." The CBI said it was pleased that global economic expansion had kept exports "robust" but said the widening trade gap was a "concern". Sudhir Junankar, a senior CBI economist, said: "The high level of sterling against the euro remains a handicap."

But there were conflicting signs from the domestic economy. House prices fell at their fastest rate for five years in August, the Royal Institution of Chartered Surveyors said. The fall was strongest in the South-east. But the Industrial Relations Service said pay deals edged up to 3.1 per cent in the past few months, the first rise since April.