Treasury officials, quizzed by MPs yesterday, conceded that a manufacturing recession due to the strong pound was a "possibility", and that the exchange rate was a "matter of concern".
Meanwhile, the pound edged higher yesterday after Willem Buiter, a member of the Bank of England's Monetary Policy Committee, said diminishing uncertainty about the single currency would help bring sterling down.
"This creates a definite risk to the inflation rate," he said in an interview with a Brussels newspaper, although he added that the Asian crisis and tough Budget might have eased pressure for higher interest rates.
Sterling ended a pfennig higher, climbing above DM3.07.
According to official figures, the deficit on trade in goods with the rest of the world amounted to pounds 1.1bn in January, down from pounds 1.3bn in December and not quite as bad as expected. The value of exports and imports both fell.
In the latest three months, both export and import volumes, excluding oil and erratic items, have been broadly flat. The Office for National Statistics said the trends nevertheless suggest the deficit is widening, although the shortfall with EU countries alone has narrowed.
Figures for trade with non-EU countries in February painted a bleaker picture. The deficit jumped from pounds 879m in January to pounds 1.6bn, and the ONS said trade with South East Asia had deteriorated sharply.
Much of the near-doubling during the month was due to one-off imports of silver and aircraft.Reuse content