UK trade deficit widens to £3.7bn

Britain's trade gap with the rest of the world widened unexpectedly in February as exports to the United States and Saudi Arabia fell sharply, official figures showed yesterday.

The Office for National Statistics said the goods trade deficit with the world widened to £3.7bn in February compared with £3.2bn in January. Stripping out oil and erratic items, the deficit hit a record £4.0bn. Exports volumes plunged by nearly 5 per cent, throwing fresh light on the scale of collapse in global demand.

The ONS said the rise in the deficit was driven by the gap with countries outside the European Union, particularly the US and Saudi Arabia. The drop in exports to the US was probably driven by fewer works of art changing hands and may have accounted for up to half of the monthly decline in exports, the ONS said. This widened the non-EU gap to £2.4bn from £2.0bn in the previous month. The deficit with EU states remained broadly unchanged at £1.25bn as exports rose to Germany, Italy and France, the ONS said.

The figures were also flattered by a rise in the oil surplus as crude prices reached their highest level since September 2001 in the run-up to the war in Iraq.

The goods deficit is running at more than 4 per cent of GDP, which is approaching the worst point of 5 per cent, recorded during the late 1980s. However, including a £1.2bn surplus in services, the total trade deficit improved to 3.3 per cent of GDP.

"The trend is quite clearly one of a widening trade deficit," said John Butler, a UK economist at HSBC.

"That is no particular surprise given the weak global environment and relatively robust domestic demand picture and is a trend that we expect to continue through 2003," he said.

The financial markets shrugged off the figures, which were overshadowed by the Budget statement that came out later yesterday.

The deficit is also unlikely to feature heavily in the debate on the Bank of England's monetary policy committee ahead of its decision on interest rates later today.

Most analysts expect the Bank to keep rates on hold this month, to give time for a resolution of the war in Iraq and to prepare its quarterly inflation report in May.

Mr Butler said that, if anything, the ballooning trade deficit would militate against a pre-emptive rate cut today. "Rate cuts would actually prove counter-productive, doing little to boost global demand and potentially re-igniting domestic demand."