Treasury claims success in rebalancing UK economy as trade deficit shrinks

The trade deficit fell to £1.9bn in August, according to the Office for National Statistics, prompting the Government to argue that the British economy is finally rebalancing.

New figures from the ONS showed that the trade in goods deficit fell to £7.8bn, down from £8.2bn in July. Britain's surplus on trade in services was unchanged at £5.9bn. The overall fall in the trade deficit was driven by a 1.3 per cent increase in the volume of exports. Imports also grew, but at a slower rate of 0.3 per cent. The value of goods exports hit a record high of £25.5bn.

The Treasury argued that the figures show that Britain is creating a "new model" of export-driven growth. A spokesman said: "Today's figures show a continued strengthening of the UK's trading position. The Government is creating a new model of economic growth that is driven by investment and exports." Alan Clarke of Scotia Capital suggested the next UK growth figures could be boosted. He said: "It's a decent improvement on the month and may yet help to give us a decent third quarter GDP."

Yet many analysts were sceptical of the notion that the lower than expected trade deficit figures represent an economic turning point and warned that the ongoing eurozone crisis is likely to squeeze demand for British exports in the months ahead. Howard Archer of IHS Global Insight said: "Severe concerns persist about the prospects for exports in the near term, at least given recent weakened global economic activity and the current worrying growth prospects."

And some leading indicators cast doubt on the idea that Britain is experiencing an export boom. A survey of manufacturing purchasing managers has indicated that export orders contracted for a second successive month in September, and at the fastest rate since May 2009. Fuels and engineering parts were mostly responsible for the rising level of exports in August. Car exports were down by £300m.

The US trade deficit also narrowed to $45.61bn (£29.1bn) in August, down from $45.63bn in July, according to figures released yesterday by the Commerce Department. However, US imports from China reached a record high of $37.4bn.