Widest trade gap in two years as exports struggle

Further evidence evidence of the fragility of the economic recovery emerged yesterday as a report showed that Britain's trade gap unexpectedly widened in May – hitting a two-year high of £3.8bn compared with £3.5bn the previous month.

The trade gap in goods, excluding services, also rose – from £7.41bn in April to £8.06bn in May. Imports jumped by 2.4 per cent but exports remained broadly flat.

There was also good news from the factory gate, with official data showing that producer prices experienced their first monthly fall since 2008. But the figures raised concerns among economists because they appeared to call into question hopes of an export-led recovery.

Philip Shaw, the chief economist at Investec, expressed surprise because other data appeared to show order books improving. "Surveys have been saying order books are up but there is nothing in the export data to show this has been the case," he added.

"One could understand that the lacklustre economic conditions in Europe are resulting in difficult export markets but the surveys are saying different. It is difficult to see why."

Howard Archer, at IHS Global Insight, said it was "another month, another set of disappointing trade data". He added: "Exports are just not picking up as much as has been hoped for. Indeed, they are lagging [behind] the growth in imports. Instead of helping the economy rebalance and being a contributor to growth, net trade has remained defiantly negative.

"We repeatedly look for the trade deficit to narrow as exports benefit increasingly from the combination of sterling's relative weakness and healthier domestic demand in key overseas markets. But exports have stubbornly only trended modestly up."

There are concerns that exports will take a battering as a result of torpid growth in the eurozone, sparked by its sovereign debt crisis and the associated tightening of fiscal policy in several countries.

UK exports of traded goods to the eurozone fell by 0.6 per cent month-on-month in May. While there were signs of improving domestic demand, these could prove to be a mirage as spending cuts and tax increases imposed by the Government to tackle the public-sector deficit begin to bite.

However, the producer prices data will at least offer some comfort to the Bank of England that inflationary pressures are finally easing.

The Office for National Statistics said producer prices dropped by 0.3 per cent in June, cutting the annual rate to 5.1 per cent from May's downwardly revised 5.5 per cent – and well below forecasts of 5.7 per cent.

Mr Shaw said: "That should help to quell any angst policymakers may have been experiencing about medium-term prices."

Vicky Redwood, the senior UK economist at Capital Economics, said: "The chances of a significant trade boost in the near-term are looking less and less promising.

"At least June's producer prices figures provide further evidence of an easing in price pressures at the start of the inflation pipeline. We still think consumer price index inflation is set to fall sharply as the temporary factors that pushed it up start to fade."