Trade gap widens despite blip

DIANE COYLE

Economics Correspondent

Britain's trade deficit with countries outside the European Union fell last month to its lowest level since April. But the shortfall for the third quarter of the year was the worst for two and a half years.

The surprise improvement in the trade position in the latest month was the result of a surge in exports. A revival of growth in the US and the return of North Sea fields to normal operations after summer maintenance accounted for most of a 10 per cent surge in the value of exports.

Some City economists were cheered by the improvement. David Hillier, UK economist at NatWest Markets, said: ''The trade figures had been adversely affected by the slowdown in the US economy and summer maintenance work in the North Sea but both factors now seem to be unwinding.''

Adam Cole at the broker James Capel was gloomier about the one-month fall in the trade gap. ''The decline does not change the picture of an underlying deterioration in the UK trade position,'' he said. The Central Statistical Office said the trend showed the deficit continuing to widen.

The headline deficit in trade in goods declined to pounds 696m in September from pounds 980m in August. About a quarter of the improvement was due to higher oil exports, up 15.6 per cent, and lower oil imports, down 6.7 per cent. Britain's oil deficit fell to pounds 17m from pounds 81m the previous month as a result.

The underlying trade balance, excluding oil and erratic items such as aircraft and precious stones, also improved. It fell to pounds 582m from pounds 744m in August.

A recovery in North American trade played an important role. The US economic slowdown had a noticeable impact on British exports, but they bounced back by 20 per cent last month. Britain's trade gap with North America narrowed from pounds 413m to pounds 174m as a result.

However, the trade figures for the whole of the third quarter presented a less cheerful prospect. The July-September deficit of pounds 2.5bn was the highest since the first quarter of 1993.

The underlying deficit was the highest since 1988. Export volumes excluding oil and erratics grew by 4.3 per cent during the quarter, compared with a 5.8 per cent rise in import volumes. Trade with North America was in the red by pounds 877m, up from pounds 655m in the second quarter.

The figures had little impact on the pound. It lost more than a pfennig against the mark, closing at DM2.2045, but this was a side-effect of the European currency turmoil. Market attention in Britain is focused on Monday's figures for the preliminary estimate of gross domestic product in the third quarter, which could be crucial for interest rate policy.