Exports surge cuts deficit to three-year low

A startling surge in exports helped cut Britain's trade deficit with the rest of the world to its lowest level for almost three years in May, official figures showed yesterday.

The global shortfall halved to £800m from £1.5bn while the trade deficit fell to £1.7bn from £2.4bn. Both deficits were the smallest since September 1999.

The improvement was led by a 7.5 per cent jump in exports – the strongest rise in more than five years – with sales to the US and some Asian nations leaping as much as 20 per cent.

This was the second month of strong export growth and will fuel hopes that figures out later today will show another good month for UK manufacturing output.

The bulk of the improvement came from countries outside the EU. Exports to non-EU countries jumped by £1bn – of which half was increased sales to the US – to a record £7.6bn, an increase of 15 per cent.

Sales to these countries have now risen by more than 10 per cent for two months running, the first time this has happened since 1988. In contrast exports to EU countries dropped 4 per cent in May although a greater fall in imports left a minuscule deficit of £27m.

"The rise in exports to the US by manufacturers makes us more confident that the recovery is under way," said John Butler, UK economist at HSBC. "It looks increasingly likely that net trade will make a positive contribution to Q2 growth – for a change."

This in turn could strengthen the hand of those on the Bank of England's Monetary Policy Committee who want to raise interest rates next month.

David Page, an economist at Investec in the City, said: "This adds to the general picture the MPC is looking at of an economy that is fairly buoyant. Were it not for the weakness of the stock market, we would be looking for a rate rise in August."

The May figures are unlikely to have picked up the full impact of the recent movements on the currency markets. Over the past three months sterling has jumped 8 per cent against the dollar and fallen 5.5 per cent against the euro, implying UK exports have become less competitive in the US but cheaper in the eurozone.

But Stephen Radley, chief economist at the Engineering Employers' Federation, said in the short run, economic strength was more important than currencies. "We are picking up evidence that exports are picking up and much better to the US than Europe," he said. "What we see is quite a strong correlation between areas with strong economic growth and export volumes."