Strong pound produces record UK trade deficit

British exports to the United States suffered their largest fall ever in January, pushing the economy to a record trade deficit and providing the first real evidence of the damage wrought by the strong pound.

British exports to the United States suffered their largest fall ever in January, pushing the economy to a record trade deficit and providing the first real evidence of the damage wrought by the strong pound.

Official figures yesterday showed the balance of trade in goods plunged to a record deficit of £5.58bn, taking the quarterly shortfall to another record of £13.98bn. This is about 5 per cent of GDP, making it the worst deficit in real terms since 1989, when the UK was gripped by an unsustainable boom.

The Office for National Statistics said exports dropped by £1.44bn or 9 per cent between December and January. More than half of this was due to a record £800m slump in sales to the US - a drop of 30 per cent.

David Ruffles, a trade statistician at the ONS, said: "The suspicion is that something is at work in the numbers and the obvious possible explanation is the pound-dollar exchange rate starting to kick in."

The pound surged in January to $1.90 against the dollar, its highest level since 1992 when sterling was struggling to keep inside the European exchange rate mechanism.

The figures were published alongside data showing that manufacturing output rose just 0.2 per cent in January, less than half the expected rate. "The trade and production figures show that the strength of the pound is beginning to harm the UK economy," said Andrij Halushka at the Centre for Economics and Business Research.

One of the biggest falls was in machinery and equipment industries, which export a large chunk of their output.

The CBI said the weakness of the dollar might prevent the global economic recovery from narrowing Britain's trade deficit. Doug Godden, the CBI's head of economic analysis, said: "The growing trade gap poses a threat to the manufacturing recovery, which is still in its infancy."

The pound fell sharply, tumbling two cents to $1.8344, as the financial markets scrapped their forecasts for further sharp rises in interest rates.

Economists said GDP growth in the current quarter would probably fall short of the 1.1 per cent pencilled in by the Bank of England. Nick Verdi, a UK economist at Barclays Capital, said: "This is yet another reason why we expect the Monetary Policy Committee to only raise rates gradually."

HSBC analysis published yesterday said the pound's rise was having an even stronger impact on the UK economy than the Bank currently believed.

It said the Bank's trade-weighted index of sterling was "out of date" and would be 5 per cent higher if it was adjusted for the growing importance of trade with Asian countries that are pegged to the dollar. "Sterling is actually higher than the narrow index suggests," said John Butler, a UK economist at HSBC.

There has been little evidence that the Bank's rate hikes in February and November have had any effect on consumer spending patterns, and yesterday's figures showed imports rose in January.