Trade gap worst in three years as exports tumble

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Economics Correspondent

Britain's trade deficit in October was the worst for nearly three years. Exports dived by pounds 771m during the month as trade with the US and the rest of Europe slowed, adding to fears that growth will remain weak this year.

The Governor of the Bank of England, Eddie George, said yesterday that there were worries about the extent of the slowdown taking place on the Continent, especially in France and Germany. With the typical understatement of a central banker he said: "Taken overall, I don't think we are concerned growth will get out of hand" - even though consumer spending would pick up.

Mr George said inflation would probably be at or below its 2.5 per cent target in two years. That was why he had recommended a quarter-point cut in base rates last month.

Alongside the news of weaker exports, separate figures yesterday pointed to a slower pace of economic growth. New housebuilding starts dipped 14 per cent in the three months to November compared with the previous three months. And the longer leading indicator of the economy, a signal of trends a year ahead, fell for the 17th month running.

The trade gap widened by pounds 688m to pounds 1.7bn in October, its highest since December 1992. The deficit with the EU rose to pounds 477m, on top of the already- published jump to pounds 1.2bn in the non-EU shortfall. Although figures showing that the non-E portion narrowed again in November to pounds 500m have already been published, economists said the unexpected deterioration in Continental trade was disappointing.

The biggest declines came in exports to Germany and the Benelux countries during the three months to October, although sales to France and the rest of the EU were also slightly lower. Imports from France, the Netherlands, Belgium and Spain all increased.

Imports of cars from EU countries increased by about pounds 500m, one of the biggest advances. Imports of other finished and semi-finished manufactures also increased significantly.

The overall trade gap in the three months to October amounted to pounds 3.9bn. Half the pounds 1bn increase during the three months was due to trade in erratic items such as ships and precious metals - notably much higher than usual imports of silver ingots, possibly due to speculative stockpiling.

Underlying exports were 3.2 per cent higher than the same period a year earlier, compared with a 4.3 per cent increase in imports. Export volumes performed better than import volumes, but import prices have risen faster.

Helen MacFarlane, an economist at brokers Hoare Govett, said exports grew in line with export markets in the first 10 months of last year, implying that British exporters had held on to their market share. "Export markets should improve this year, so the prospects for trade are reasonable," she said.

Slower growth in Britain would also limit increases in imports. "The trade gap should return to a modestly improving trend," said Michael Saunders at Salomon Brothers.

Other City economists were gloomier about the likelihood of a pick-up in British markets. "Export volumes will weaken further as overseas demand stagnates," said Adam Cole at James Capel.

Sterling weakened on yesterday's trade figures, falling to DM2.2225 from the previous day's close of DM2.2304. Its index against a range of currencies fell 0.2 to 83.1. Mr George said yesterday that he hoped uncertainty about the general election had already been priced in by the foreign exchange markets.