Wider trade gap fuels economy fears

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Britain's trade deficit unexpectedly grew in May, official figures showed today, raising the prospect of the Bank of England pumping more cash into the economy to jump-start the lagging recovery.

The goods trade deficit - the gap between goods exported and imported - shot up to £8.5 billion from £7.6 billion in April, when analysts had expected it to shrink to £7.2 billion.

The figures have compounded fears over the strength of the economic recovery in the second quarter as services and manufacturing surveys in the period have revealed a mixed performance.

The weak trade data, coupled with improved inflation figures for June, led analysts to suggest the Bank could boost its £200 billion quantitative easing programme.

Chris Williamson, chief economist at Markit, said: "The trade figures will certainly add to calls for a further loosening of policy via more quantitative easing, especially give the surprise dip in inflation to 4.2% today.

"Without growth of overseas trade, the doves on the Monetary Policy Committee are therefore likely to be increasingly concerned that the economy could slip back into recession."

The UK's economy grew by 0.5% in the first quarter of 2011, after a 0.5% decline in the final quarter of 2010, meaning the economy effectively flatlined for six months.

Some economists have raised fears that the economy may have contracted by as much as 0.2% between April and June after weak industry data and the raft of bank holidays.

The mediocre performance between January and March was propped up by net trade - which added a 1.4% to overall growth - but figures in the second quarter suggest net trade could have been negative.

The figures from the Office for National Statistics showed imports increased by 5.8% in May, driven by a record increase in chemicals including pharmaceuticals, outweighing a 4.2% increase in exports.

A record shipping of silver goods from the UK was overshadowed by a near-10% plunge in car exports, which were hit by the impact the Japanese tsunami and earthquake had on component supplies.

Jonathan Loynes, chief European economist at Capital Economics, said: "May's dreadful trade figures look like another blow to hopes of a strong boost to growth from net trade. Overall, further support for the view that monetary policy is more likely to be loosened than tightened over the next year or so."

The monetary policy argument has gradually tipped away from the case for a rate hike to rein in high inflation back towards a potential need for another bout of QE.

Further QE - or asset purchases as it is also known - could encourage banks to lend, encourage investment and depress the value of the pound, which could stimulate exports.

The UK economy is struggling in the face of a slowdown in consumer spending, Government spending cuts and high inflation.

The international background has become more uncertain, with worsening debt problems in the eurozone and concerns around the US housing market, which has hit hopes of rebalancing the UK economy toward net exports.