Recovering exports cut trade gap and boost sterling

A STRONG recovery in exports helped cut the UK's trade gap with the rest of world, according to figures published yesterday.

The positive data, combined with a survey showing manufacturers' optimism at a two- year high, boosted the pound to a lifetime high against the euro - just hours after the Bank of England said sterling's rise was "unwelcome".

The global trade deficit narrowed in July to pounds 2.22bn, down from pounds 2.56bn in June and well below City forecasts of pounds 2.6bn. The final figure was boosted by a fall in the deficit with the European Union to pounds 218m, the lowest since January 1998 and a fall from pounds 812m previously. The improvement was driven by a 3.5 per cent rise in exports and an equivalent fall in imports.

More timely figures showed the deficit with non-EU nations narrowed in August to pounds 1.58bn from pounds 2bn in July, indicatingfurther improvement ahead.

Analysts focused on underlying trade figures, which exclude oil and other erratics. On this basis the global deficit narrowed to pounds 2.2bn from pounds 2.7bn, while the latest non-EU data showed a drop to pounds 957m from pounds 1.4bn. Exports in August surged by 6.5 per cent, boosted by a recovery in demand in Asia and strong demand from the US.

The pound hit a lifetime high against the euro, touching pounds 0.6373. Against the dollar, sterling was little changed at $1.6378, compared with yesterday's four-month high of $1.6409. "Eddie [George] is unlikely to get the softer pound he wants in the near future," said Jeremy Hawkins, of Bank of America.

Dharshini David, of HSBC, said that as global activity grew, exports and the trade balance should improve.

"Unlike the US, the UK does not appear to be on the brink of succumbing to a ballooning trade deficit," she said.

The Confederation of British Industry appealed to the Bank not to hike rates again. The plea came as its monthly survey of manufacturers found the sector emerging further from the doldrums. Optimism about output remained at a two-year high in September while domestic and overseas orders recovered to their best level since March 1998 although both were still negative.

Sudhir Junankar, a senior CBI economist, said: "Any further rise in interest and exchange rates this year could seriously damage companies' ability to export."

A number of economists brought forward to October their forecasts for the next rate hike after figures on Wednesday showed the economy grew faster than previously thought in the second quarter.