World trade gap narrows but ONS says trend is worsening

Britain's trade deficit with the rest of the world narrowed to £2.5bn in May, from £2.6bn in April as exports surged to a record high of £15.3bn, according to official figures published yesterday.

Britain's trade deficit with the rest of the world narrowed to £2.5bn in May, from £2.6bn in April as exports surged to a record high of £15.3bn, according to official figures published yesterday.

The trade gap was larger than the £2.1bn expected by forecasters, mainly due to a widening in the deficit with the rest of the European Union. The EU trade gap widened to £700m from £400m as the strength of the pound against the euro sucked in imports, which surged 6.5 per cent to a record monthly level. "Perhaps the laws of economics have not been repealed after all," said Ray Attrill, research director at 4cast, the analysts firm, referring to the recent strong trade with Europe.

While exports to the EU were almost flat, sales to North America and Asia - where the pound has been more stable - rose strongly

The Office for National Statistics said the latest figures suggested the UK trade deficit was getting worse. It said the trends in the value of trade showed both exports and imports were rising.

Analysts said the data, which showed a strong rise in core imports, added to doubts that domestic demand was slowing. This, they said, could increase the chances of an interest rate rise at next week's Monetary Policy Committee meeting. Meanwhile, more timely data showed that the trade deficit with countries outside the EU widened to £2.1bn in June from £1.8bn the previous month. Analysts had expected a shortfall of £1.9bn.

"Underlying export volumes were up, so pound strength may be less of an issue than first appearances suggest," said Bank America economist Jeremy Hawkins.

"Rather, the large headline figure reflects a sharp increase in core import volumes. This will not be wasted on the Bank of England and should be seen as increasing slightly the likelihood of a rate hike next week."