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Non-EU trade deficit is worst on record

THE UK'S trade deficit with countries outside the European Union was the worst on record last year, according to new figures published yesterday, as exports to emerging markets plummeted and cheap imports soared.

The Office for National Statistics said the UK's non-EU goods trade deficit totalled pounds 15.7bn in 1998, almost double the 1997 shortfall. In December alone, the goods deficit with non-EU countries was pounds 1.6bn, according to official data released yesterday.

The news came as the Institute for Fiscal Studies warned that UK growth could fall to 0.4 per cent this year, far lower than the 1 per cent to 1.5 per cent in the official Government forecast. However, despite this gloomy outlook for the UK economy, the Chancellor will still meet his fiscal golden rule - only borrow to invest, the IFS said.

Economists predicted there would be no early let-up of pressures on UK exporters, which are struggling with both a high exchange rate and deteriorating economic conditions overseas.

David Brickman, economist at PaineWebber International, said: "The underlying tone is one of chronically weak exports, which points to a further widening of the trade deficit."

Economists at ABN Amro warned: "While falling rates and, at some point, a weaker pound, should bring the improvement in trade trends that exporters seem already to be anticipating, net trade will drag on growth right through 1999."

The figures also revealed a steady deterioration in the UK's trade position within the EU. The EU deficit on traded goods widened to pounds 418m in November, compared to an October deficit of pounds 290m. Economists said the fact that EU trade had held up better than non-EU trade suggested it was the Asian crisis, not the strong pound, that had most damaged UK export prospects.

John O'Sullivan at Greenwich NatWest said: "For all the assertions about sterling's over-valuation against the euro bloc, export and import growth to and from the region has remained broadly in balance over the last year. The collapse in South-east Asia, rather than sterling strength against the DM bloc, was the key reason for the UK's wider trade gap in 1998."

John Redwood, the shadow secretary for trade and industry, called the latest trade figures - which also revealed that the global trade deficit in goods hit a 10-year high in the three months to November - "appaling". Brian Wilson, the Trade Minister, said he was "keenly aware" of the hardships facing many of Britain's exporters.

The only bright spot in yesterday's trade data was in the service sector, where exports in the three months to November hit a record high. The global surplus in services in November was little changed at pounds 1.1bn.

Analysts said that although the trade figures underlined the pressures on UK exporters, they were no worse than expected. As such, the data are not expected to impact upon next week's interest rate decision by the Monetary Policy Committee.

Neil Parker, Treasury economist at Royal Bank of Scotland, said: "The market consensus was for a slightly smaller global deficit and a slightly bigger non-EU deficit. As for their impact on the Monetary Policy Committee, we expect this to be negligible."

The market shrugged off the trade figures and the pound strengthened against the euro amid speculation that the European Central Bank would soon be forced to cut interest rates on the Continent. The euro closed at pounds 0.6963 compared with pounds 0.6975 on Tuesday, and hit an all-time low against the dollar.

News analysis, page 21